<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------------------
For Quarter Ended March 31, 2000 Commission File Number 1-13179
FLOWSERVE CORPORATION
(Exact name of Registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
31-0267900
(I.R.S. Employer Identification Number)
222 W. LAS COLINAS BLVD., SUITE 1500, IRVING, TEXAS 75039
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 443-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
SHARES OF COMMON STOCK, $1.25 PAR VALUE,
OUTSTANDING AS OF MARCH 31, 2000 37,422,629
<PAGE> 2
FLOWSERVE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income -
Three Months Ended March 31, 2000 and 1999 (unaudited) 3
Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 2000 and 1999 (unaudited) 3
Consolidated Balance Sheets -
March 31, 2000 (unaudited) and December 31, 1999 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
INDEX TO EXHIBITS 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLOWSERVE CORPORATION
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Sales $ 285,309 $ 269,387
Cost of sales 186,080 172,597
------------ ------------
Gross profit 99,229 96,790
Selling and administrative expense 71,628 67,110
Research, engineering and development expense 6,155 6,872
Merger integration expense -- 3,432
------------ ------------
Operating income 21,446 19,376
Interest expense 6,523 3,083
Other (income) expense, net (3,217) 523
------------ ------------
Earnings before income taxes 18,140 15,770
Provision for income taxes 6,258 5,362
------------ ------------
Net earnings $ 11,882 $ 10,408
============ ============
Net earnings per share (basic and diluted) $ 0.31 $ 0.28
============ ============
Weighted average shares outstanding 37,810 37,591
============ ============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net earnings $ 11,882 $ 10,408
Foreign currency translation adjustments 9,253 779
------------ ------------
Comprehensive income $ 2,629 $ 9,629
============ ============
</TABLE>
3
<PAGE> 4
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
MARCH 31, December 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,935 $ 30,463
Accounts receivable, net 233,364 213,625
Inventories 208,475 168,356
Prepaids and other current assets 42,701 41,344
------------ ------------
Total current assets 508,475 453,788
Property, plant and equipment, net 223,450 209,976
Intangible assets, net 149,719 96,435
Other assets 83,369 77,952
------------ ------------
Total assets $ 965,013 $ 838,151
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 78,965 $ 72,103
Notes payable 1,459 734
Income taxes 977 7,878
Accrued liabilities 107,820 111,820
Long-term debt due within one year 1,488 3,125
------------ ------------
Total current liabilities 190,709 195,660
Long-term debt due after one year 322,266 198,010
Postretirement benefits and deferred items 140,946 136,207
Commitments and contingencies Shareholders' equity:
Serial preferred stock, $1.00 par value
Shares authorized - 1,000 -- --
Shares issued and outstanding - None
Common stock, $1.25 par value
Shares authorized - 120,000
Shares issued and outstanding - 41,484 51,856 51,856
Capital in excess of par value 67,916 67,963
Retained earnings 356,136 344,254
------------ ------------
475,908 464,073
Treasury stock at cost - 4,062 and 4,071 shares (93,212) (93,448)
Accumulated other comprehensive expense (71,604) (62,351)
------------ ------------
Total shareholders' equity 311,092 308,274
------------ ------------
Total liabilities and shareholders' equity $ 965,013 $ 838,151
============ ============
</TABLE>
4
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FLOWSERVE CORPORATION
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Net earnings $ 11,882 $ 10,408
Adjustments to reconcile net earnings to net cash used by
operating activities:
Depreciation 8,041 9,551
Amortization 2,574 806
Loss on the sale of fixed assets 1 539
Change in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable 7,955 (9,095)
Inventories (15,861) 3,808
Prepaid expenses 1,572 (113)
Other assets (2,916) (2,995)
Accounts payable (2,535) (5,570)
Accrued liabilities (21,568) (5,539)
Income taxes (2,988) (1,748)
Postretirement benefits and deferred items (1,568) (247)
Net deferred taxes 1,235 (1,543)
------------ ------------
Net cash flows used by operating activities (14,176) (1,738)
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures, net of disposals (4,394) (11,504)
Payment for acquisitions, net of cash acquired (22,172) --
------------ ------------
Net cash flows used by investing activities (26,566) (11,504)
CASH FLOWS - FINANCING ACTIVITIES:
Net repayments under lines of credit (831) (317)
Payments on long-term debt (1,062) (6,310)
Proceeds from long-term debt including revolving credit facility 36,798 15,547
Treasury share purchases -- (3,333)
Other stock activity 168 238
Dividends paid -- (5,290)
------------ ------------
Net cash flows provided by financing activities 35,073 535
Effect of exchange rate changes (859) (881)
------------ ------------
Net change in cash and cash equivalents (6,528) (13,588)
Cash and cash equivalents at beginning of year 30,463 24,928
------------ ------------
Cash and cash equivalents at end of period $ 23,935 $ 11,340
============ ============
Taxes paid $ 9,453 $ 6,772
Interest paid $ 5,751 $ 2,615
</TABLE>
5
<PAGE> 6
FLOWSERVE CORPORATION
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
1. ACCOUNTING POLICIES - BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of March 31, 2000, and the
related consolidated statements of income, comprehensive income and cash flows
for the three months ended March 31, 2000 and 1999, are unaudited. In
management's opinion, all adjustments comprising normal recurring adjustments
necessary for a fair presentation of such financial statements have been made.
The accompanying consolidated financial statements and notes in this Form 10-Q
are presented as permitted by Regulation S-X and do not contain certain
information included in the Company's annual financial statements and notes to
the financial statements. Accordingly, the accompanying consolidated financial
information should be read in conjunction with the Company's 1999 Annual Report.
Interim results are not necessarily indicative of results to be expected for a
full year.
2. INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined for
certain inventories by the last-in, first-out (LIFO) method and for other
inventories by the first-in, first-out (FIFO) method.
Inventories and the method of determining costs were:
<TABLE>
<CAPTION>
MARCH 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials $ 32,050 $ 29,674
Work in process and
finished goods 227,047 182,493
Less: Progress billings (12,464) (5,746)
------------ ------------
246,633 206,421
LIFO reserve (38,158) (38,065)
------------ ------------
Net inventory $ 208,475 $ 168,356
============ ============
Percent of inventory
accounted for by LIFO 61% 64%
Percent of inventory
accounted for by FIFO 39% 36%
</TABLE>
3. EARNINGS PER SHARE
Earnings per share is presented in accordance with SFAS No. 128, "Earnings
Per Share." The Company's potentially dilutive common stock equivalents have
been immaterial for all periods presented. Accordingly, basic earnings per share
is equal to diluted earnings per share and is presented on the same line for
income statement presentation.
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1999, the Financial Accounting Standards Board issued one Statement of
Financial Accounting Standard (SFAS) that was applicable to the Company - SFAS
No. 137, "Deferral of the Effective Date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is now effective
for fiscal years beginning after June 15,
6
<PAGE> 7
2000. This standard is not expected to materially impact Flowserve's reported
financial position, results of operations or cash flows.
5. RESTRUCTURING
In the fourth quarter of 1999, the Company initiated a restructuring
program that included a one-time charge of $15,860 recorded as restructuring
expense. The restructuring charge related to the planned closure of 10
facilities and a corresponding reduction in workforce at those locations, as
well as at other locations that are part of the restructuring.
The restructuring program is expected to result in a net reduction of
approximately 300 employees at a cost of $12,900. In addition, exit costs
associated with the facilities closings are estimated at $2,960. As of March 31,
2000, the program had resulted in a net reduction of 111 employees.
Expenditures charged to the 1999 restructuring reserve were:
<TABLE>
<CAPTION>
Other Exit
Severance Costs Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 24, 1999 $ 12,900 $ 2,960 $ 15,860
Cash expenditures (102) -- (102)
------------ ------------ ------------
Balance at December 31, 1999 12,798 2,960 15,758
CASH EXPENDITURES (1,693) (583) (2,276)
------------ ------------ ------------
BALANCE AT MARCH 31, 2000 $ 11,105 $ 2,377 $ 13,482
============ ============ ============
</TABLE>
6. ACQUISITION
On January 13, 2000, the Company acquired Innovative Valve Technologies,
Inc. (Invatec), a company which is principally engaged in providing
comprehensive maintenance, repair, replacement and value-added distribution
services for valves, piping systems, instrumentation and other process-system
components for industrial customers.
The purchase involved acquiring all of the outstanding stock of Invatec and
assuming Invatec's existing debt and related obligations. The transaction was
accounted for under the purchase method of accounting and was financed by
utilizing funds from the Company's working capital. The results of operations
for Invatec are included in the Company's condensed consolidated financial
statements from the date of acquisition. The purchase price was approximately
$18.3 million in cash. Liabilities of $94.9 million were simultaneously paid off
through borrowings under Flowserve's revolving credit agreement.
The purchase price has been allocated to the net assets acquired based
primarily on information furnished by management of the acquired company. The
preliminary estimated fair value of net identifiable assets acquired exceeded
the purchase price by $4.3 million which resulted in net additional goodwill of
$48.6 million at the time of the purchase. The final allocation of the purchase
price will be determined in a reasonable time and will be based on a complete
evaluation of assets acquired and the liabilities assumed. Accordingly, the
information presented herein may differ from the final purchase price
allocation.
The following unaudited pro forma information presents the consolidated
results of operations as if the acquisition occurred on
7
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January 1, 1999, after giving effect to certain adjustments, including, goodwill
amortization, interest and related income tax effects. The pro forma information
does not purport to represent what the Company's results of operations actually
would have been had such transactions or events occurred on the dates specified,
or to project the Company's results of operations for any future period. Pro
forma information has not been presented for 2000 as results prior to the
acquisition, (January 1, 2000 to January 12, 2000), are not material.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical
-----------------------------
Innovative Pro Forma
Flowserve Valve Pro Forma Combined
Corp. Technologies Adjustments Company
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 269,387 $ 43,931 $ -- $ 313,318
Cost of Sales 172,597 30,803 -- 203,400
------------ ------------ ------------ ------------
Gross Profit 96,790 13,128 -- 109,918
Selling and administrative expense 67,110 11,005 (14)(a) 78,101
Research, engineering and development expense 6,872 -- -- 6,872
Merger integration expense 3,432 -- -- 3,432
------------ ------------ ------------ ------------
Operating Income 19,376 2,123 14 21,513
Interest expense 3,083 1,932 (1,732)(b) 3,283
Other expense (income), net 523 (38) -- 485
------------ ------------ ------------ ------------
Earnings before income taxes 15,770 229 1,746 17,745
Provision for income taxes 5,362 271 489(c) 6,122
------------ ------------ ------------ ------------
Net income (loss) $ 10,408 $ (42) $ 1,257 $ 11,623
============ ============ ============ ============
Earnings per share (basic and diluted) $ 0.28 $ -- $ -- $ 0.31
Weighted average shares outstanding (basic and diluted) 37,591 9,665 -- 37,591
</TABLE>
Pro Forma Adjustments
Selling and administrative expense:
<TABLE>
<S> <C>
(a) Represents incremental decrease in annual goodwill amortization based on
decrease of $4,279 in estimated goodwill originating from the acquisition
and the reduction of the amortization period from 40 to 20 years. (14)
Interest expense:
(b) Represents reduction in consolidated interest expense related to debt
financing prior to the acquisition date (1,732)
Provision for income taxes:
(c) Represents income tax adjust required to arrive at a combined company pro
forma effective tax rate of 34.5% 489
</TABLE>
8
<PAGE> 9
7. SEGMENT INFORMATION
The Company has three divisions, each of which constitutes a business
segment. Each division manufactures different products and is defined by the
type of products and services provided. Each division has a President, who
reports directly to the Chief Executive Officer, and a Division Controller. For
decision-making purposes, the Chief Executive Officer, Chief Financial Officer
and other members of upper management use financial information generated and
reported at the division level. The Company also has a corporate headquarters
that does not constitute a separate division or business segment.
Amounts classified as All Other include Corporate Headquarters costs and
other minor entities that are not considered separate segments. The Company
evaluates segment performance and allocates resources based on profit or loss
excluding merger integration, interest expense, other income or expense and
income taxes. Intersegment sales and transfers are recorded at cost plus a
profit margin. Minor reclassifications have been made to certain previously
reported information to conform to the current business configuration.
<TABLE>
<CAPTION>
ROTATING FLOW FLOW CONSOLIDATED
THREE MONTHS ENDED MARCH 31, 2000 EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL
- --------------------------------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SALES TO EXTERNAL CUSTOMERS $ 72,588 $ 65,261 $ 145,922 $ 1,538 $ 285,309
INTERSEGMENT SALES 845 2,508 2,958 (6,311) --
SEGMENT OPERATING INCOME 3,932 7,775 16,651 (6,912) 21,446
IDENTIFIABLE ASSETS $ 223,655 $ 210,303 $ 434,173 $ 96,882 $ 965,013
</TABLE>
<TABLE>
<CAPTION>
Rotating Flow Flow Consolidated
Three Months Ended March 31, 1999 Equipment Control Solutions All Other Total
- --------------------------------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $ 90,099 $ 71,471 $ 105,741 $ 2,076 $ 269,387
Intersegment sales 1,442 4,102 2,956 (8,500) --
Segment operating income (before
special items) 6,587 7,938 14,823 (6,540) 22,808
Identifiable assets $ 258,046 $ 222,855 $ 286,040 $ 96,856 $ 863,797
</TABLE>
Reconciliation of the total segment operating income before special items
to consolidated earnings before income taxes follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------------ ------------
<S> <C> <C>
Total segment operating income (before special items) $ 28,358 $ 29,348
Corporate expenses and other 6,912 6,540
Merger integration expense -- 3,432
Interest expense 6,523 3,083
Other (income) expense (3,217) 523
------------ ------------
Earnings before income taxes $ 18,140 $ 15,770
============ ============
</TABLE>
9
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8. SUBSEQUENT EVENT
On February 10, 2000, the Company announced that it had signed a definitive
agreement to acquire Ingersoll-Dresser Pumps (IDP) for $775 million in cash. The
transaction, which will be accounted for as a purchase, will be financed with a
combination of bank financing and senior subordinated notes. Upon closing the
transaction, the existing Flowserve debt must be repaid. Flowserve has received
$1,425 million of committed financing to pay for the acquisition and pay off
existing debt as well as provide for $300 million revolving credit facility in
connection with the acquisition. The transaction is contingent on regulatory
approvals and management believes it will close by the end of June 2000.
----------------------------------------------------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31,2000
In general, results for the first quarter of 2000 were higher than the
corresponding period in the previous year due to the Company's acquisition of
Innovative Valve Technologies, Inc. (Invatec) on January 12, 2000. The
acquisition of Invatec is discussed in further detail in the Liquidity and
Capital Resources section of this Management Discussion and Analysis.
Sales increased 5.9% to $285.3 million for the three months ended March 31,
2000, compared with $269.4 million for the same period in 1999. Sales for the
quarter would have been $244.8 million without the acquisition of Invatec, 9.1%
below the first quarter of 1999. The change in sales is discussed further in the
following section on business segments. Net sales to international customers,
including export sales from the U.S., were approximately 45% during the first
quarter of 2000, compared with 52% during the first quarter of 1999. The lower
2000 percentage is due to Invatec's markets being principally U.S. Bookings
(incoming orders for which there are purchase commitments) were $310.7 million,
23.0% higher than the first quarter of 1999 when bookings were $252.6 million.
Excluding Invatec, bookings also showed year-on-year improvement of 5.9%.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments: Rotating
Equipment Division (RED) for engineered pumps; Flow Control Division (FCD) for
automated and manual quarter-turn valves, control valves and nuclear valves and
valve actuators; and Flow Solutions Division (FSD) for precision mechanical
seals and flow management services.
Sales and operating income before special items (merger-related expenses)
for each of the three business segments are:
<TABLE>
<CAPTION>
ROTATING EQUIPMENT
DIVISION
-------------------------
Three Months Ended
March 31,
-------------------------
(In millions of dollars) 2000 1999
------------------------ ---------- ----------
<S> <C> <C>
Sales $ 73.4 $ 91.5
Operating income 3.9 6.6
</TABLE>
The sales decrease in 2000 was generally due to a reduced opening backlog
of highly engineered pumps. Unfavorable currency translation also reduced sales
by about 3%.
Operating income before special items, as a percentage of sales, declined
to approximately 5.3% in 2000 from about 7.2% in the prior-year period. The
operating income margin declined despite an improved gross margin due to an
improved product mix and a 10% reduction of operating expenses due to the lower
sales base.
<TABLE>
<CAPTION>
FLOW CONTROL DIVISION
-------------------------
Three Months Ended
March 31,
-------------------------
(In millions of dollars) 2000 1999
------------------------ ---------- ----------
<S> <C> <C>
Sales $ 67.8 $ 75.6
Operating income 7.8 7.9
</TABLE>
The decrease in sales was due to reduced backlog at the beginning of the
quarter and lower book-to-build volume during the quarter. Unfavorable currency
translation also reduced sales by about 1%.
Operating income before special items, as a percentage of sales, was 11.5%
in the first quarter of 2000, compared with 10.5% in 1999. The improved
operating margin in 2000 was generally due to improved gross margins and lower
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operating expenses. These improvements were generally due to reduced costs
principally related to the Company's restructuring program initiated in the
fourth quarter of 1999.
<TABLE>
<CAPTION>
FLOW SOLUTIONS DIVISION
-------------------------
Three Months Ended
March 31,
-------------------------
(In millions of dollars) 2000 1999
------------------------ ---------- ----------
<S> <C> <C>
Sales $ 148.9 $ 108.7
Operating Income 16.7 14.8
</TABLE>
Sales were higher than the prior-year period generally due to the
acquisition of Invatec. The increase in sales was offset slightly by an
unfavorable currency translation which reduced sales by about 2%.
Operating income before special items, as a percentage of sales, decreased
to 11.2% from 13.6% in 1999. The lower margins were generally due to the
acquisition of Invatec, as Invatec's gross margins are historically lower than
the balance of FSD operations, and period integration expenses relating to the
Company's 1999 restructuring program.
CONSOLIDATED RESULTS
The gross profit margin was 34.8% for the three months ended March 31,
2000, compared with 35.9% for the same period in 1999. The decrease was due to
the lower margins associated with Invatec. Excluding Invatec, margins are
comparable to the prior year. Excluding period costs of $1.4 million related to
the 1999 restructuring program, the gross margin excluding Invatec was the
highest since the fourth quarter of 1998.
Selling and administrative expense as a percentage of net sales was 25.1%
for the three-month period ended March 31, 2000, compared with 24.9% for the
corresponding 1999 period. The slight increase was due to period costs incurred
as a result of the Company's 1999 restructuring program and Invatec integration
costs of $0.7 million and costs associated with Flowserver, the Company's global
business process improvement initiative, which totaled $1.3 million in the first
quarter of 2000. In 1999, Flowserver expenses were $3.4 million and were
identified and disclosed separately as merger integration expense.
Research, engineering and development expense was $6.2 million for the
first quarter of 2000, compared with $6.9 million during the same period last
year. The lower level of spending was generally the result of cost control
initiatives and the reallocation of resources to assist in project engineering.
Interest expense during the first quarter of 2000 was $6.5 million, up $3.4
million from the same period in 1999 due to higher interest rates and the
increased borrowing levels required to acquire Invatec stock and retire debt
obtained in the acquisition.
The Company recorded other income of $3.2 million in the first quarter of
2000, primarily as a result of two factors. Income of $1.8 million was realized
due to the quarterly mark-to-market adjustment requirement under the provisions
of EITF No. 97-14 "Accounting for Deferred Compensation Agreements Where Amounts
Earned are Held in a Rabbi Trust and Invested". In addition, $1.0 million of
income was recorded as a result of the Company reaching an agreement and
receiving payment on an outstanding promissory note which had previously been
fully reserved.
The Company's effective tax rate for the first quarter of 2000 was 34.5%
compared to 34.0% in the first quarter of 1999. The increase was due to the
acquisition of Invatec.
12
<PAGE> 13
Net earnings for the first quarter of 2000 were $11.9 million or $0.31 per
share. This was 14.4% above net earnings of $10.4 million, or $0.28 per share,
for the same period in 1999. Excluding special items, net earnings for the first
quarter of 1999 were $12.7 million or $0.34 per share.
RESTRUCTURING
In the fourth quarter of 1999, the Company initiated a restructuring
program designed to streamline the Company for better value and improve asset
utilization. This $26.7 million program consisted of a one-time charge of $15.9
million recorded as restructuring expense and $10.8 million of other special
items. The restructuring charge related to the planned closure of 10 facilities
and a corresponding reduction in workforce at those locations, as well as at
other locations that are part of the restructuring. The other special items
related to inventory impairments, a fixed asset impairment, and executive
separation contracts and certain costs related to fourth-quarter 1999 facility
closures.
The Company currently expects to realize ongoing annual operating income
benefits of approximately $20 million per year effective in 2001 from this
program. Approximately $10 million of savings is expected to be realized in
selling and administrative expense, while the remainder is expected in costs of
sales.
In 2000, period integration costs related to the implementation of the
program are expected to offset a majority of the potential benefit. Current
estimates are that planned savings of approximately $10 million will be offset
by period integration costs.
Additionally, in 2000, a majority of the costs associated with the
restructuring program will be incurred and charged against the restructuring
reserve.
The restructuring program is expected to result in a net reduction of
approximately 300 employees. As of March 31, 2000, the program had resulted in a
net reduction of 111 employees.
Expenditures charged to the restructuring reserve as of March 31, 2000
were:
<TABLE>
<CAPTION>
Other Exit
Severance Costs Total
---------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 24, 1999 $ 12,900 $ 2,960 $ 15,860
Cash expenditures (102) -- (102)
------------ ------------ ------------
Balance at December 31, 1999 12,798 2,960 15,758
CASH EXPENDITURES (1,693) (583) (2,276)
------------ ------------ ------------
BALANCE AT MARCH 31, 2000 $ 11,105 $ 2,377 $ 13,482
============ ============ ============
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities for the first three months of 2000
were significantly below the same period in 1999. The decrease in cash flows in
2000 was primarily due to payments relating to the restructuring program and
Invatec acquisition.
Capital expenditures, net of disposals, were $4.4 million during the first
three months of 2000, compared with $11.5 million in the first three months of
1999. The reduction reflects a concerted effort by the Company to reduce capital
spending. Capital expenditures were funded primarily by operating cash flows.
On January 13, 2000, the Company acquired Invatec, a company which is
principally engaged in providing comprehensive maintenance, repair, replacement
and value-added distribution
13
<PAGE> 14
services for valves, piping systems, instrumentation and other process-system
components for industrial customers.
The purchase involved acquiring all of the outstanding stock of Invatec and
assuming Invatec's existing debt and related obligations. The transaction was
accounted for under the purchase method of accounting and was financed through
borrowings under the revolving credit facility. The results of operations for
Invatec are included in the Company's condensed consolidated financial
statements from the date of acquisition. The purchase price was approximately
$18.3 million in cash. Liabilities of $94.9 million were simultaneously paid
through borrowing under Flowserve's revolving credit agreement.
The purchase price has been allocated to the net assets acquired based
primarily on information furnished by management of the acquired company. The
preliminary estimated fair value of net identifiable assets acquired exceeded
the purchase price by $4.3 million, which resulted in net additional goodwill of
$48.6 million at the time of the purchase. The final allocation of the purchase
price will be determined in a reasonable time and will be based on a complete
evaluation of assets acquired and the liabilities assumed. Accordingly, the
information presented herein may differ from the final purchase price
allocation.
On February 10, 2000, the Company announced it had reached a definitive
agreement to acquire Ingersoll-Dresser Pumps (IDP) from Ingersoll-Rand for $775
million in cash. The acquisition is expected to close by the end of June 2000.
In connection with the acquisition, all of the Company's existing debt is
expected to be refinanced. The Company has signed a commitment letter from
Credit Suisse/First Boston and Bank of America for $1,425 million of financing
to acquire IDP. The Company also announced it was suspending the payment of its
cash dividend, which is required by the proposed financing. The Company believes
that internally generated funds, including synergies from the IDP acquisition,
will be adequate to service the debt.
At March 31, 2000, total debt was 51.1% of the Company's capital structure,
compared with 39.6% at December 31, 1999. The interest coverage ratio of the
Company's indebtedness was 5.4 times interest at March 31, 2000, compared with
4.3 times interest at December 31, 1999.
YEAR 2000 ISSUES
Flowserve Corporation began preparing for the Year 2000 almost two years ago.
The Company assessed how it might be impacted by the Year 2000 issue, and
formulated and completed implementation of a comprehensive plan to address all
concerns. To the best of the Company's knowledge, all mission-critical business
and non-information technology systems now support its ability to provide
products and services into the 21st century.
With regard to information systems, production and other equipment and
products, the Company completed all remediation and testing before the end of
1999.
The Company believes that the Year 2000 issue did not pose significant
operational problems for the Company but will continue to monitor the situation
closely. The Company believes that its early and thorough preparation has
enabled it to meet the needs of customers and stakeholders without significant
interruption into the new century.
14
<PAGE> 15
FORWARDING-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This Report on Form 10-Q and other written reports and oral statements made
from time to time by the Company contain various forward-looking statements and
include assumptions about Flowserve's future market conditions, operations and
results. These statements are based on current expectations and are subject to
significant risks and uncertainties. They are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Among the
many factors that could cause actual results to differ materially from the
forward-looking statements are: further changes in the already competitive
environment for the Company's products or competitors' responses to Flowserve's
strategies; the Company's ability to integrate IDP and Invatec into its
management and operations; political risks or trade embargoes affecting
important country markets; the health of the petroleum, chemical and power
industries; economic turmoil in areas outside the United States; continued
economic growth within the United States; unanticipated difficulties or costs or
reduction in benefits associated with the implementation of the Company's
"Flowserver" business process improvement initiative, including software; and
the recognition of significant expenses associated with adjustments to realign
the combined Company's facilities and other capabilities with its strategic and
business conditions including, without limitation, expenses incurred in
restructuring the Company's operations to incorporate IDP facilities, and the
cost of financing to be assumed in acquiring IDP. The Company undertakes no
obligation to publicly update or revise any forward-looking statement as a
result of new information, future events or otherwise.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
There have been no material changes in reported market risk since the end
of 1999.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the first quarter of 2000, the Company issued 8,000 shares of
restricted common stock pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933. Shares were issued for the
benefit of one officer and one other employee, subject to restrictions on
transfer and vesting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.1 Purchase Agreement among Flowserve Corporation, Flowserve RED
Corporation, IDP Acquisition, LLC and Ingersoll-Rand Company, dated as of
February 9, 2000.
Exhibit - 27. Financial Data Schedule.
(b) Reports on Form 8-K
Form 8-K dated January 13, 2000, Item 2, Acquisition of Assets-Relating to
the Purchase of Innovative Valve Technologies, Inc. This Form 8-K was
amended on March 21, 2000 to include Item 7(a), Financial Statements of
Business Acquired and Item 7(b), Pro Forma Financial Information.
Form 8-K dated February 9, 2000, Item 5, Other Events, Purchase Agreement
with Ingersoll-Rand Company.
-------------------------------------------------
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOWSERVE CORPORATION
(Registrant)
/s/ Renee J. Hornbaker
------------------------------------------
Renee J. Hornbaker
Vice President and Chief Financial Officer
Date: May 12, 2000
- ------------------
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Purchase Agreement Among Flowserve Corporation, Flowserve
RED Corporation, IDP Acquisition, LLC and Ingersoll-Rand
Company, dated as of February 9, 2000
27 Financial Data Schedule
</TABLE>
18
<PAGE> 1
EXHIBIT 2.1
PURCHASE AGREEMENT
Among
FLOWSERVE CORPORATION,
FLOWSERVE RED CORPORATION,
IDP ACQUISITION, LLC
and
INGERSOLL-RAND COMPANY
dated as of
February 9, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
PURCHASE AND SALE OF INTEREST
<S> <C> <C>
1.1 Transfers by Sellers of the Interests...........................................................1
1.2 Consideration...................................................................................1
1.3 The Closing.....................................................................................2
1.4 Further Assurances..............................................................................3
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS
2.1 Organization....................................................................................3
2.2 Subsidiaries....................................................................................4
2.3 Ownership of Interests..........................................................................5
2.4 Authorization, Etc..............................................................................5
2.5 Financial Statements............................................................................5
2.6 Absence of Undisclosed Liabilities; Net Assets Amount...........................................6
2.7 No Approvals or Conflicts.......................................................................6
2.8 Compliance with Law; Governmental Authorizations................................................7
2.9 Litigation......................................................................................7
2.10 Personal Property Assets........................................................................7
2.11 Absence of Certain Changes......................................................................8
2.12 Tax Matters.....................................................................................9
2.13 Employee Benefits..............................................................................10
2.14 Labor Relations................................................................................12
2.15 Patents, Copyrights, Trademarks and Service Marks, Etc.........................................12
2.16 Contracts......................................................................................12
2.17 Environmental Matters..........................................................................14
2.18 Insurance......................................................................................15
2.19 Real Property..................................................................................15
2.20 Product Liability..............................................................................16
2.21 No Brokers' or Other Fees......................................................................16
2.22 Receivables....................................................................................16
2.23 Inventories....................................................................................16
2.24 Contracts with the United States Government....................................................17
2.25 No Other Representations or Warranties.........................................................17
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYERS
3.1 Organization...................................................................................17
3.2 Authorization Etc..............................................................................18
3.3 No Approvals or Conflicts......................................................................18
3.4 Financing......................................................................................18
3.5 No Brokers' or Other Fees......................................................................18
3.6 No Other Representations or Warranties.........................................................18
ARTICLE IV
CONDITIONS TO SELLERS' OBLIGATION
4.1 Representations and Warranties.................................................................19
4.2 Performance....................................................................................19
4.3 Officer's Certificate..........................................................................19
4.4 HSR Act........................................................................................19
4.5 Injunctions....................................................................................19
4.6 Consents.......................................................................................19
4.7 Standby Letter(s) of Credit....................................................................19
ARTICLE V
CONDITIONS TO BUYERS' OBLIGATION
5.1 Representations and Warranties.................................................................20
5.2 Performance....................................................................................20
5.3 Officer's Certificate..........................................................................20
5.4 Resignation of Management Committee Members....................................................20
5.5 HSR Act........................................................................................20
5.6 Injunctions....................................................................................20
5.7 Consents.......................................................................................20
5.8 Material Adverse Effect........................................................................20
5.9 Market Conditions..............................................................................21
5.10 Audited Financial Statements...................................................................21
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE VI
COVENANTS AND AGREEMENTS
6.1 Conduct of Business by Partnership Group.......................................................21
6.2 Access to Books and Records; Cooperation.......................................................22
6.3 Filings and Consents...........................................................................23
6.4 Tax Matters; Cooperation; Preparation of Returns; Tax Elections;
Restructurings.................................................................................24
6.5 Tax Indemnity..................................................................................26
6.6 Employees; Benefit Plans.......................................................................27
6.7 Labor Matters..................................................................................31
6.8 Covenant to Satisfy Conditions.................................................................32
6.9 Contact With Customers and Suppliers...........................................................32
6.10 Projections....................................................................................32
6.11 Competition....................................................................................32
6.12 Certain Environmental Matters..................................................................33
6.13 Environmental Rights and Responsibilities After Execution of Agreement.........................34
6.14 Uses of Name...................................................................................35
6.15 Lease..........................................................................................37
6.16 Financing......................................................................................37
6.17 Government Contracts...........................................................................37
6.18 Financing Cooperation..........................................................................38
ARTICLE VII
TERMINATION
7.1 Termination....................................................................................38
7.2 Procedure and Effect of Termination............................................................39
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification................................................................................39
ARTICLE IX
MISCELLANEOUS
9.1 Fees and Expenses..............................................................................43
9.2 Governing Law..................................................................................43
9.3 Amendment......................................................................................43
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
9.4 No Assignment..................................................................................43
9.5 Waiver.........................................................................................43
9.6 Notices........................................................................................43
9.7 Complete Agreement.............................................................................46
9.8 Counterparts...................................................................................46
9.9 Publicity......................................................................................46
9.10 Headings.......................................................................................46
9.11 Severability...................................................................................46
9.12 Third Parties..................................................................................46
9.13 CONSENT TO JURISDICTION........................................................................46
9.14 WAIVER OF JURY TRIAL...........................................................................47
</TABLE>
iv
<PAGE> 6
PURCHASE AGREEMENT
This Purchase Agreement (this "Agreement"), dated as of February
9, 2000, is entered into by and among Flowserve Corporation, a New York
corporation ("Buyer 1"), Flowserve RED Corporation, a Delaware corporation
("Buyer 2"; and collectively with Buyer 1, the "Buyers"), IDP Acquisition, LLC,
a Delaware limited liability company ("Seller 1"), and Ingersoll-Rand Company, a
New Jersey corporation ("Seller 2"; and collectively with Seller 1, the
"Sellers").
WHEREAS, Seller 1 owns a 49% partnership interest (the "49%
Partnership Interest") in Ingersoll-Dresser Pump Company, a Delaware general
partnership (the "Partnership"), and Seller 2 owns a 51% partnership interest
(the "51% Partnership Interest"; and collectively with the 49% Partnership
Interest, the "Partnership Interests" or the "Interests") in the Partnership.
WHEREAS, Buyer 1 desires to purchase from Seller 1, and Seller 1
desires to sell to Buyer 1, the 49% Partnership Interest upon the terms and
conditions set forth herein.
WHEREAS, Buyer 2 desires to purchase from Seller 2, and Seller 2
desires to sell to Buyer 2, the 51% Partnership Interest upon the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained herein, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF INTERESTS
1.1 Transfers by Sellers of the Interests. (a) On the Closing Date
(as defined in Section 1.3) and subject to the terms and conditions set forth in
this Agreement, Seller 1 will sell, assign and transfer to Buyer 1, all of
Seller 1's right, title and interest in and to the 49% Partnership Interest free
and clear of all options, pledges, mortgages, security interests, liens,
restrictions on voting or transfer or other encumbrances of any nature
("Encumbrances"), other than such as may be created by or on behalf of either of
the Buyers.
(b) On the Closing Date and subject to the terms and conditions
set forth in this Agreement, Seller 2 will sell, assign and transfer to Buyer 2,
all of Seller 2's right, title and interest in and to the 51% Partnership
Interest free and clear of all Encumbrances, other than such as may be created
by or on behalf of either of the Buyers.
1.2 Consideration On the Closing Date and subject to the terms and
conditions set forth in this Agreement, in reliance on the representations,
warranties, covenants and agreements of the parties contained herein and in
consideration of the sale, assignment and transfer of the Interests, the Buyers
will pay the following amounts in cash: (a) Buyer 1 will pay
<PAGE> 7
2
three hundred seventy nine million seven hundred fifty thousand dollars
($379,750,00) to Seller 1 for the 49% Partnership Interest; and (b) Buyer 2 will
pay three hundred ninety five million two hundred fifty thousand dollars
($395,250,000) to Seller 2 for the 51% Partnership Interest (the amounts in
clauses (a) and (b), as adjusted pursuant to the provisions of this Agreement,
the "Purchase Price").
1.3 The Closing. Unless this Agreement shall have been terminated
and the transactions contemplated herein shall have been abandoned pursuant to
Article VII, subject to Articles IV and V, the closing (the "Closing") of the
transactions contemplated by this Agreement shall take place at the offices of
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017, on
the third business day following the satisfaction or waiver of all of the
conditions set forth in Articles IV and V hereof (the "Closing Date"), or at
such other place and time as may be agreed upon by the Sellers and the Buyers,
provided, however, that if on or after April 17, 2000, all conditions to Closing
set forth in Article IV and Article V have been satisfied or waived but Buyers
do not have sufficient funds available to enable Buyers to complete the
transactions contemplated by this Agreement, Buyers may, upon written notice
thereof to Sellers, defer the Closing Date until any date that is not later than
the earlier of (i) the date that is six (6) weeks from (i) April 24, 2000 and
(ii) the date that all of the conditions set forth in Articles IV and V hereof
have been satisfied or waived but in no event later than June 30, 2000 (such
deferral period, the "Extension Period"). In the event the Extension Period is
utilized, the Buyers shall pay to the Sellers at Closing (which shall occur
subject to satisfaction or waiver of all conditions in Articles IV and V at such
extended Closing Date) interest on the Purchase Price at a rate equal to LIBOR
(as defined below) plus four percent (4%) during the Extension Period. "LIBOR"
means the London interbank offered rate for one-month, U.S. dollar deposits
appearing on Dow Jones Market Service page 3750 (or any successor page). In the
event Buyers fail to perform their obligation to close due to the fact that
Buyers do not have sufficient funds available to enable Buyers to complete the
transactions contemplated by this Agreement, Sellers shall not be entitled to
specific performance and Buyers' damages to Sellers as a result thereof, if any,
shall not exceed fifty million dollars ($50,000,000). For the purpose of this
Section 1.3, April 24, 2000 shall be extended by one day for each day later than
February 18, 2000 that Sellers provide Buyers with the Partnership Group's 1999
audited financial statements.
(a) Deliveries by the Sellers. At or prior to the Closing, the
Sellers shall deliver or cause to be delivered to the Buyers the
following:
(i) such assignments and other instruments and
documents as shall be effective to vest in Buyer 1 and Buyer 2,
respectively, on the Closing Date, good and marketable title to
the Partnership Interests, subject, in each case, to no
Encumbrances other than such as may be created by or on behalf of
either of the Buyers;
(ii) resignations of Sellers' appointees to the
Partnership's Management Committee as contemplated by Section
5.4(a) hereof; and
<PAGE> 8
3
(iii) all other previously undelivered documents
required by this Agreement to be delivered by the Sellers to the
Buyers at or prior to the Closing Date in connection with the
transactions contemplated hereby.
(b) Deliveries by the Buyers.
(i) at or prior to the Closing Date, the Buyers shall deliver
or cause to be delivered to or for the benefit of the Sellers the
amounts in cash specified in Section 1.2, by wire transfer of
immediately available funds to an account or accounts designated
by Sellers in writing at least two business days prior to the
Closing Date; and
(ii) all other previously undelivered documents required by
this Agreement to be delivered by the Buyers to the Sellers at or
prior to the Closing Date in connection with the transactions
contemplated hereby.
(c) All instruments and documents executed and delivered to the
Buyers pursuant hereto shall be in form and substance, and shall be
executed in a manner, reasonably satisfactory to the Buyers. All
instruments and documents executed and delivered to the Sellers
pursuant hereto shall be in form and substance, and shall be executed
in a manner, reasonably satisfactory to the Sellers.
1.4 Further Assurances. After the Closing, each party hereto shall
from time to time, at the request of another party, execute and deliver such
other instruments of conveyance and transfer and take such other actions as such
other party may reasonably request in order to more effectively consummate the
transactions contemplated hereby and to vest in Buyer 1 good and valid title to
the 49% Partnership Interest, and in Buyer 2 good and valid title to the 51%
Partnership Interest.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS
The Sellers, jointly and severally, hereby represent and warrant
to the Buyers as follows:
2.1 Organization. (a) The Partnership is a general partnership
duly formed, validly existing and in good standing under the laws of the State
of Delaware. The Partnership has all requisite partnership power and authority
to own (which will be deemed for purposes of this Agreement to include leasing
and operating) its assets and to carry on its business as now being conducted
and is duly qualified or licensed to do business and is in good standing in the
jurisdictions in which the ownership of its property or the conduct of its
business requires such qualification or license, except jurisdictions in which
the failure to be so qualified or licensed would not, individually or in the
aggregate, have a material adverse effect on the business, results of
operations, assets or financial condition of the Partnership Group (as defined
in Section 2.2)
<PAGE> 9
4
taken as a whole (hereinafter referred to as a "Material Adverse Effect").
Complete and correct copies of the Partnership's Organization Agreement and all
amendments thereto, the Partnership's Partnership Agreement and all amendments
thereto (the "Partnership Agreement") and the minute books of the Partnership's
Management Committee have been made available to the Buyers on or prior to the
date of this Agreement. Except as set forth in Section 2.1 of the disclosure
schedule being delivered to the Buyers by the Sellers simultaneously with the
execution and delivery of this Agreement (the "Disclosure Schedule"), the
Partnership Group does not own or have any option or right to acquire, directly
or indirectly, any capital stock or other equity securities of, or have any
direct or indirect equity or ownership interest or debt investment in, any
corporation, association, partnership, joint venture or other business.
(b) Seller 1 is a limited liability company, duly formed, validly
existing and in good standing under the laws of the State of Delaware. Seller 1
has all requisite limited liability company power and authority to own its
assets and to carry on its business as now being conducted and is duly qualified
or licensed to do business and is in good standing in the jurisdictions in which
the ownership of its property or the conduct of its business requires such
qualification or license, except jurisdictions in which the failure to be so
qualified or licensed would not, individually or in the aggregate, have a
material adverse effect on the ability of the Sellers to consummate the
transactions contemplated by this Agreement.
(c) Seller 2 is a corporation, duly organized, validly existing
and in good standing under the laws of the State of New Jersey. Seller 2 has all
requisite corporate power and authority to own its assets and to carry on its
business as now being conducted and is duly qualified or licensed to do business
and is in good standing in the jurisdictions in which the ownership of its
property or the conduct of its business requires such qualification or license,
except jurisdictions in which the failure to be so qualified or licensed would
not, individually or in the aggregate, have a material adverse effect on the
ability of the Sellers to consummate the transactions contemplated by this
Agreement.
2.2 Subsidiaries. Section 2.2 of the Disclosure Schedule sets
forth for each direct and indirect controlled affiliate of the Partnership (each
a "Subsidiary"; and all of the Subsidiaries together with the Partnership are
collectively referred to herein as the "Partnership Group" with the Partnership
and each Subsidiary constituting a member of the Partnership Group for purposes
of this Agreement) (i) its structure (i.e., corporation, partnership, limited
liability company, etc.), name and jurisdiction of incorporation, formation or
organization, as applicable, and (ii) the number of issued and outstanding
shares of each class of its capital stock or other issued and outstanding equity
interests, as applicable, the names of the holders thereof, and the number of
shares or percentage interests, as applicable, held by each such holder. Each
Subsidiary is duly formed or organized, validly existing and, where applicable,
in good standing under the laws of its jurisdiction of incorporation, formation
or organization, as applicable, has the requisite corporate or similar power and
authority to own its assets and to carry on its business as now being conducted,
and where applicable, is duly qualified or licensed to do business and is in
good standing in the jurisdictions in which the ownership of its property or the
conduct of its business requires such qualification or license, except
jurisdictions in which the failure to be so qualified or licensed would not,
individually or in the aggregate, have a Material Adverse Effect. All the
outstanding shares of capital stock or other equity interests of such
<PAGE> 10
5
Subsidiaries are duly authorized and validly issued and outstanding, fully paid
and nonassessable (where applicable) and owned by the persons set forth in
Section 2.2 of the Disclosure Schedule. Except as set forth in Section 2.2 of
the Disclosure Schedule, there are no options, warrants, calls, commitments,
agreements, contracts, understandings, restrictions, arrangements or rights of
any character with respect to the securities of the Subsidiaries or the issuance
of additional securities of the Subsidiaries. Complete and correct copies of the
charter documents (or equivalent organizational documents) and all amendments
thereto and the minute books of each of the Subsidiaries have been made
available to the Buyers on or prior to the date of this Agreement.
2.3 Ownership of Interests.
(a) Seller 1 is the legal and beneficial owner of the 49%
Partnership Interest and Seller 2 is the legal and beneficial owner of the 51%
Partnership Interest, which constitute all of the Partnership Interests. Except
as provided in this Agreement, there are no options, warrants, calls,
commitments, agreements, contracts, understandings, restrictions, arrangements
or rights of any character with respect to (i) the Partnership Interests other
than those contained in the Partnership Agreement or (ii) the issuance of
additional partnership interests of the Partnership.
(b) Seller 1 has good and marketable title to the 49% Partnership
Interest, and Seller 2 has good and marketable title to the 51% Partnership
Interest, in each case, free and clear of all Encumbrances, and such good and
marketable title to the Interests shall be transferred to the Buyers on the
Closing Date free and clear of all Encumbrances, other than such as may be
created by or on behalf of either of the Buyers.
2.4 Authorization, Etc. Seller 1 has full limited liability
company power and authority to execute and deliver this Agreement and to carry
out the transactions contemplated hereby to be carried out by it. Seller 2 has
full corporate power and authority to execute and deliver this Agreement and to
carry out the transactions contemplated hereby to be carried out by it. This
Agreement has been duly and validly executed by each Seller and, assuming this
Agreement constitutes the legal, valid and binding agreement of the other
parties hereto, constitutes a legal, valid and binding agreement of each Seller,
enforceable against such Seller in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
2.5 Financial Statements. Sellers have made available to Buyers
the audited consolidated balance sheets of the Partnership Group at December 31,
1998, 1997 and 1996 and the related consolidated statements of income and cash
flows (the "Audited Financial Statements"). All such financial statements have
been examined by the auditors whose reports thereon are included with such
financial statements. Sellers have also made available to Buyers the unaudited
consolidated balance sheet of the Partnership Group at September 30, 1999 (the
"1999 Balance Sheet") and the related consolidated statement of income for the
nine-month period then ended. All the foregoing financial statements have been
prepared from the books and
<PAGE> 11
6
records of the Partnership Group in conformity with accounting principles
generally accepted in the United States of America ("GAAP"), as in effect during
the periods indicated, except that the unaudited interim financial statements
are subject to normal year-end or recurring audit adjustments and lack footnotes
and other presentation items. All the foregoing income statements and statements
of cash flow present fairly in all material respects the consolidated results of
operations and cash flows of the Partnership Group for the respective periods
covered, and the balance sheets present fairly in all material respects the
consolidated financial condition of the Partnership Group as of their respective
dates, in each case in conformity with GAAP (except as stated above with respect
to unaudited interim financial statements).
2.6 Absence of Undisclosed Liabilities; Net Assets Amount. (a)
There are no liabilities of any kind whatsoever (whether absolute, accrued,
contingent or otherwise, and whether due or to become due) that are required to
be reflected in, or disclosed in the notes to, a consolidated balance sheet of
the Partnership Group prepared in conformity with GAAP, other than liabilities
and obligations (i) reflected in the 1999 Balance Sheet or the Audited Financial
Statements (or disclosed in the notes thereto), (ii) arising after September 30,
1999, in the ordinary course of business and consistent with past practices or
(iii) disclosed in Section 2.6 of the Disclosure Schedule.
(b) The consolidated net assets of the Partnership Group as of the
Closing Date (the "Net Assets Amount") will be no less than one hundred forty
million dollars ($140,000,000). For purposes of the calculation referred to in
the immediately preceding sentence, the consolidated net assets of the
Partnership Group shall include the assets and liabilities of the types
reflected on the 1999 Balance Sheet that are to be retained by the Partnership
Group pursuant to the provisions of this Agreement and shall also include, among
other things, cash and marketable securities (to the extent not transferred to
the Sellers prior to the Closing Date), but shall not include amounts due to and
from the Sellers and their subsidiaries other than as a result of trade
receivables and trade payables. The Net Assets Amount shall be calculated in
conformity with GAAP, applied on a basis consistent with the 1999 Balance Sheet.
2.7 No Approvals or Conflicts. Except as set forth in Section 2.7
of the Disclosure Schedule, the execution, delivery and performance by the
Sellers of this Agreement and the consummation by the Sellers of the
transactions contemplated hereby will not (i) violate, conflict with or result
in a breach by the Sellers or any member of the Partnership Group of any
provision of the Partnership Agreement or the charter (or equivalent) document
of either Seller or any Subsidiary, (ii) violate, conflict with or result in a
breach of any provision of, or constitute a default by the Sellers or any member
of the Partnership Group (or create an event which, with notice or lapse of time
or both, would constitute such a default) or give rise to any right of
termination, cancellation, amendment or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of any member of the Partnership Group or on the Interests under, any
note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
lease, contract, agreement or other instrument to which any of the Sellers, any
member of the Partnership Group or any of their respective properties may be
bound, (iii) violate or result in a breach of any order, injunction, judgment,
ruling, law or regulation of any court or governmental authority applicable to
any of the Sellers, any member of the Partnership Group or any of their
respective properties or (iv) except for applicable requirements
<PAGE> 12
7
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and approvals attributable to the Buyers and the nature and
circumstances of their businesses, require any order, consent, approval or
authorization of, or notice to, or declaration, filing, application,
qualification or registration with, any governmental or regulatory authority,
except, with respect to the foregoing clauses (ii), (iii) and (iv) above, as
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect or a material adverse effect on the ability of the
Sellers to consummate the transactions contemplated by this Agreement.
2.8 Compliance with Law; Governmental Authorizations. Except as
set forth in Section 2.8 of the Disclosure Schedule, no member of the
Partnership Group is in violation of any order, injunction, judgment, ruling,
law or regulation of any court or governmental authority applicable to the
property or business of the Partnership Group, except where noncompliance would
not reasonably be expected to have a Material Adverse Effect. The Partnership
Group has all licenses, permits and other governmental authorizations necessary
to conduct its business as currently conducted (all of which are valid and in
full force and effect) , except where the failure to have such licenses, permits
and other governmental authorizations would not reasonably be expected to have a
Material Adverse Effect.
2.9 Litigation. Except as set forth in Section 2.9 of the
Disclosure Schedule, as of the date hereof, there are no written claims, suits,
actions, proceedings or investigations ("Actions") pending or, to the knowledge
of the Sellers, threatened against any Seller or any member of the Partnership
Group or the transactions contemplated by this Agreement before any arbitrator,
court or governmental or regulatory authority or body, which, if decided
unfavorably to such Seller or member of the Partnership Group, would have a
Material Adverse Effect or a material adverse effect on the ability of the
Sellers to consummate the transactions contemplated by this Agreement. Except as
set forth in Section 2.9 of the Disclosure Schedule, the Sellers have not
received any notice that any Seller or any member of the Partnership Group or
any of its assets is or is reasonably likely to become subject to any decree,
order or judgment which would reasonably be expected to have a Material Adverse
Effect or a material adverse effect on the ability of the Sellers to consummate
the transactions contemplated by this Agreement.
2.10 Personal Property Assets. Except as set forth in Section 2.10
of the Disclosure Schedule, on September 30, 1999, the Partnership Group had
and, except with respect to personal property assets disposed of or acquired in
the ordinary course of business consistent with past practice since such date,
the Partnership Group now has, good and valid title to, or holds by valid and
existing lease or license, all the personal property assets reflected as assets
of the Partnership Group on the 1999 Balance Sheet or which would have been
reflected on the 1999 Balance Sheet if acquired prior to such date, free and
clear of all Encumbrances of any nature except for: (i) Encumbrances which
secure indebtedness or obligations which are properly reflected on the 1999
Balance Sheet; (ii) liens for Taxes (as defined in Section 2.12) not yet payable
or being contested in good faith; (iii) liens arising as a matter of law in the
ordinary course of business, provided that the obligations secured by such liens
are not delinquent or are being contested in good faith; and (iv) such
imperfections of title and Encumbrances which, individually or in the aggregate,
would not materially interfere with the use of or materially impair the value of
such personal property assets. Except as set forth in Section 2.10 of the
Disclosure Schedule, the Partnership Group owns, or has valid leasehold
interests in, and will
<PAGE> 13
8
transfer to Buyers good and marketable title to all material tangible personal
property assets necessary for the operation or conduct of the Partnership
Group's business as currently conducted and all such assets are in reasonably
good maintenance, operating condition and repair, normal wear and tear excepted,
other than machinery and equipment under repair or out of service in the
ordinary course of the Partnership Group's business.
2.11 Absence of Certain Changes. Except as set forth in Section
2.11 of the Disclosure Schedule or as otherwise provided herein, and except for
the transactions contemplated by the Transaction Agreement dated as of December
30, 1999 among the Partnership, the Sellers, Halliburton International, Inc. and
Dresser Industries, Inc. (the "Transaction Agreement"), since September 30,
1999, (i) the business of the Partnership Group has been conducted only in the
ordinary course consistent with past practice in all material respects, and (ii)
the Partnership Group has not suffered a Material Adverse Effect or any event
reasonably likely to have a Material Adverse Effect. Without limiting the
generality of the foregoing, except as set forth in Section 2.11 of the
Disclosure Schedule or as otherwise provided herein, and except for the
transactions contemplated by the Transaction Agreement, since September 30,
1999, there has not been:
(a) any damage, destruction or loss or other failure to maintain
in good condition (whether or not covered by insurance) affecting the
business or assets of the Partnership Group that has had a Material
Adverse Effect;
(b) any option, subscription, warrant, call, commitment or
agreement of any character granted or made by any member of the
Partnership Group in respect of its capital stock or other equity
interests or any third party loan or guarantee made by any member of the
Partnership Group;
(c) any issuance, declaration, setting aside or payment of any
dividend or other distribution of cash or property on any of the capital
stock or other equity interests of any member of the Partnership Group
(excluding distributions by wholly owned Subsidiaries to the Partnership
or other wholly owned Subsidiaries), or any direct or indirect
redemption, purchase or other acquisition of any shares of capital stock
or other equity interests of any member of the Partnership Group;
(d) any strikes, work stoppages or other material labor disputes
involving employees of the Partnership Group;
(e) any amendment, termination, waiver or cancellation of any term
of any Material Contract (as defined in Section 2.16), or of any right or
claim of the Partnership Group under any Material Contract, which has
had, or reasonably can be expected to have, a Material Adverse Effect;
(f) any purchase or other acquisition, sale, transfer or other
disposition of assets of the Partnership Group having an aggregate value
exceeding one million dollars ($1,000,000), excluding sales of assets in
the ordinary course of business consistent with
<PAGE> 14
9
past practice and capital expenditures consistent with the Partnership
Group's capital expenditure plans;
(g) any (i) general increase in the compensation of employees of
the Partnership Group other than in the ordinary course of business
consistent with past practice, (ii) increase in any compensation payable
to any officer or other member of senior management of the Partnership,
whether or not in the ordinary course of business consistent with past
practice or (iii) loan or commitment therefor made by any member of the
Partnership Group to any officer or other member of senior management of
the Partnership or to either of the Sellers or any of their officers,
directors or affiliates (other than the Partnership Group);
(h) any material change in the accounting methods or practices
followed by any member of the Partnership Group (other than such as have
been required by applicable law or generally accepted accounting
principles;
(i) any failure to pay any creditor any material amount or to
compromise any material claim; or
(j) any agreement or commitment by or on behalf of the Partnership
Group to do any of the foregoing.
2.12 Tax Matters. (a) For purposes of this Agreement, the
following terms shall have the following meanings:
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Tax" or "Taxes" shall mean any taxes of any kind, including but
not limited to those on or measured by or referred to as income, gross
receipts, capital, sales, use, ad valorem, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, transfer, gains, value added, property or windfall profits
taxes, customs, duties or similar fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additions
to tax or additional amounts imposed by any governmental authority,
domestic or foreign.
"Taxing Authority" shall mean, with respect to any Tax, the
government entity or political subdivision thereof that imposes such Tax
and the agency (if any) charged with the collection of such Tax for such
entity or subdivision.
"Tax Return" shall mean any return, report or statement required
to be filed with any governmental authority with respect to Taxes,
including any schedule or attachment thereto or amendment thereof.
"Treasury Regulations" shall mean the Treasury Regulations
promulgated under the Code.
<PAGE> 15
10
(b) Except as set forth in Section 2.12 of the Disclosure
Schedule:
(i) All Tax Returns required to be filed by or on behalf of each
member of the Partnership Group have been or shall be timely filed (and
each such Tax Return is true, correct and complete in all material
respects), and all Taxes (whether or not shown as due on such Tax
Returns) have been or shall be paid within the prescribed period other
than Taxes that are being contested in good faith as disclosed in Section
2.12(b) of the Disclosure Schedule.
(ii) No claim for unpaid Taxes has become a lien against the
assets or any property of any member of the Partnership Group or is being
asserted against any member of the Partnership Group except for liens for
Taxes not yet due and payable.
(iii) There are no: (w) examinations, audits, actions,
proceedings, investigations or disputes pending, (x) claims asserted in
writing, for Taxes upon any member of the Partnership Group, (y) waivers
or extensions of statutes of limitation with respect to any member of the
Partnership Group currently in effect, and (z) closing agreements, or
similar agreements entered into or issued by any Taxing Authority with
respect to any member of the Partnership Group.
(iv) None of the assets of any member of the Partnership Group is
an asset or property that is or will be required to be treated as
described in Section 168(f)(8) of the Internal Revenue Code of 1954, as
amended and as in effect immediately before the enactment of the Tax
Reform Act of 1986, or tax-exempt use property within the meaning of
Section 168(h)(1) of the Code.
(v) No member of the Partnership Group is a party to any Tax
sharing or Tax indemnity agreement.
(vi) For the taxable year ending on December 31, 1999, the Sellers
reasonably believe that the tax positions of the Partnership and its
Subsidiaries will be substantially similar to the tax positions for the
taxable year ending December 31, 1998 with respect to whether the
Partnership and any of its Subsidiaries (a) had an amount includible in
its income under section 951 of the Code, (b) derived 75 percent or more
of its gross income from passive income within section 1297(b) of the
Code and (c) held assets over 50 percent of which were held for the
production of passive income within section 1297(b) of the Code.
(vii) No member of the Partnership Group has an unrecaptured
overall foreign loss within the meaning of section 904(f) of the Code.
2.13 Employee Benefits. (a) Section 2.13 of the Disclosure
Schedule sets forth a list of each material "employee benefit plan" (within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")), and each severance, change in control or employment plan,
program or agreement, and vacation, incentive, bonus, stock option, stock
purchase, and restricted stock plan or policy sponsored or maintained
<PAGE> 16
11
by each member of the Partnership Group, in which present or former employees of
any member of the Partnership Group (the "Partnership Employees") participate
(collectively, the "Partnership Group Plans"). Partnership Group Plans which are
sponsored or maintained by members of the Partnership Group that are domiciled
in the United States of America shall hereinafter be referred to as "U.S.
Partnership Group Plans" and Partnership Group Plans which are not U.S.
Partnership Group Plans shall hereinafter be referred to as "Foreign Partnership
Group Plans".
(b) The U.S. Partnership Group Plans and, to the knowledge of the
Sellers, the Foreign Partnership Group Plans are in compliance with their terms
and applicable requirements of ERISA, the Code, and other applicable laws and
regulations, except where the failure to so comply would not have a Material
Adverse Effect. Each U.S. Partnership Group Plan which is intended to be
qualified within the meaning of Section 401 of the Code has received a favorable
determination letter as to its qualification, and to the knowledge of the
Sellers, nothing has occurred that could reasonably be expected to affect such
qualification.
(c) There are no pending or, to the knowledge of the Sellers,
threatened claims or litigations with respect to any U.S. Partnership Group
Plans, other than claims for benefits by participants and beneficiaries in the
ordinary course.
(d) With respect to each Partnership Group Plan, the Sellers have
made available to the Buyers (to the extent applicable): (i) a complete and
accurate copy of each such plan; (ii) the most recent copy of its favorable
determination letter; (iii) trust documents in effect for the U.S. Partnership
Group Plans and (iv) summaries of material modifications and summary plan
descriptions, that have been distributed to employees.
(e) With respect to any U.S. Partnership Group Plan, no
"reportable event" (as such term is defined in ERISA section 4043) has occurred
that is reasonably likely to result in a plan termination, which termination is
reasonably likely to have a Material Adverse Effect.
(f) With respect to any U.S. Partnership Group Plan, neither the
Sellers nor the Partnership Group has incurred any unsatisfied liability under,
arising out of or by operation of Title IV of ERISA (other than liability for
premiums to the Pension Benefit Guaranty Corporation and contributions to any
Partnership Group Plan, each in the ordinary course), and no fact or event
exists or is anticipated (including the transactions contemplated by this
Agreement) which could give rise to such liability, in any case, except
liability that is not reasonably likely to have a Material Adverse Effect. Each
of the Transferred Plans (as defined in Section 6.6(a)) may, in accordance with
its terms, be terminated without giving rise to any liability other than
liability for benefits accrued prior to such termination and other than
liability that is not reasonably likely to have a Material Adverse Effect.
(g) Except for the obligations under the PSP (as defined in
Section 6.6(a)(ii)(A)) and the obligations to the employees listed in Section
2.16 of the Disclosure Schedule under Section 2.16(a)(vii), no U.S. Partnership
Group Plan will, as a direct result of the execution or approval of this
Agreement or the consummation of the transactions contemplated by this
Agreement, be reasonably likely to result in the payment, accrual, vesting,
enhancement or acceleration of payments, benefits or rights to any Partnership
Employee.
<PAGE> 17
12
2.14 Labor Relations. Except as set forth in Section 2.14 of the
Disclosure Schedule, (i) no member of the Partnership Group is a party to any
collective bargaining agreement applicable to employees of a member of the
Partnership Group, nor is any such contract or agreement presently being
negotiated; (ii) there is no unfair labor practice charge or complaint pending
or, to the knowledge of the Sellers, threatened against or otherwise affecting a
member of the Partnership Group which, if adversely determined, would reasonably
be likely to result in a liability having a Material Adverse Effect; (iii) there
is no labor strike, slowdown, work stoppage, or lockout in effect, or, to the
knowledge of the Sellers, threatened against or otherwise affecting a member of
the Partnership Group, and no member of the Partnership Group has experienced
any such labor controversy within the past three years; (iv) no member of the
Partnership Group is a party to, or otherwise bound by, any consent decree with,
or citation by, any governmental authority relating to employees or employment
practices; and (v) each member of the Partnership Group is in compliance with
its obligations pursuant to the Worker Adjustment and Retraining Notification
Act of 1988 ("WARN Act"), and all other notification and bargaining obligations
arising under any collective bargaining agreement, statute or otherwise. To the
knowledge of the Sellers, there is no effort to organize employees of any member
of the Partnership Group which is pending or threatened.
2.15 Patents, Copyrights, Trademarks and Service Marks, Etc.
Section 2.15 of the Disclosure Schedule lists all patent, copyright, trademark
and service mark registrations or applications owned or held by the members of
the Partnership Group. Except as would not reasonably be expected, individually
or in the aggregate, to have a Material Adverse Effect or as otherwise set forth
in Section 2.15 of the Disclosure Schedule: (i) the members of the Partnership
Group own all the patents, inventions, technology, know-how, copyrights,
software, trademarks, service marks, and other proprietary rights ("Intellectual
Property") necessary to operate the Partnership Group's business in all material
respects as currently conducted ("Partnership Group IP"); (ii) to the Sellers'
knowledge, the Partnership Group IP does not infringe, and is not being
infringed by, the Intellectual Property of any third party; (iii) no suit,
action, proceeding, judgment, order, injunction or decree is pending or, to the
Sellers' knowledge, threatened, that challenges the validity of, or any right of
any member of the Partnership Group to use, any Partnership Group IP; and (iv)
the Partnership Group takes reasonable actions to protect and maintain the
Partnership Group IP.
2.16 Contracts. (a) Section 2.16 of the Disclosure Schedule sets
forth a complete list of each of the following contracts, instruments, leases,
deeds and agreements to which any member of the Partnership Group is a party or
by which any of them is bound other than contracts, instruments, leases, deeds
and agreements to which Sellers or other members of the Partnership Group are
the only other parties (collectively, the "Material Contracts"):
(i) indentures, mortgages, loan agreements, capital leases,
security agreements, or other agreements or commitments for the borrowing
of money, or the deferred purchase price of assets;
(ii) purchase or sales orders and other contracts for the sales of
goods and services by the Partnership Group, excluding any such orders or
contracts not involving
<PAGE> 18
13
payments to the Partnership Group exceeding two million dollars
($2,000,000) in any instance;
(iii) contracts involving the expenditure by the Partnership Group
of more than one million dollars ($1,000,000) in any instance for the
purchase of material, supplies, equipment or services;
(iv) contracts not otherwise described in this paragraph (a) that
involve the expenditure by the Partnership Group of more than five
hundred thousand dollars ($500,000), excluding any thereof that are
terminable by the Partnership Group without penalty on not more than 90
days notice;
(v) guarantees of the obligations of third parties, excluding
guarantees involving the potential expenditure by the Partnership Group
of less than one hundred thousand dollars ($100,000) in any instance and
five hundred thousand dollars ($500,000) in the aggregate;
(vi) agreements which restrict the Partnership Group from
competing with any other person or entity or from conducting business in
any geographic area;
(vii) contracts or agreements (other than employment agreements)
with officers or other members of senior management of any member of the
Partnership Group;
(viii) license agreements (as licensor or licensee) with third
parties (excluding end-user licenses granted to customers of the
Partnership Group);
(ix) employment agreements with officers or other members of
senior management of any member of the Partnership Group;
(x) contracts relating to the acquisition of any business
enterprise or the assets thereof;
(xi) exclusive distributor, dealer or similar contracts; and
(xii) contracts involving payments to the Partnership Group
exceeding two million dollars ($2,000,000) which include liquidated
damages provisions with a maximum exposure of five hundred thousand
dollars ($500,000) or more.
(b) True and correct copies (or, if oral, written summaries) of
each of the Material Contracts and the Partnership's standard form of product
warranty have been made available to the Buyers.
(c) Except as set forth in Section 2.16 of the Disclosure
Schedule, each Material Contract is in full force and effect, and is a valid and
binding agreement of the applicable member or members of the Partnership Group
and (to the knowledge of the Sellers) each of the other parties thereto,
enforceable against them in accordance with its terms, subject to the effects
<PAGE> 19
14
of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing. Except as set forth in
Section 2.16 of the Disclosure Schedule, no condition exists or event has
occurred that (whether with or without notice or lapse of time or both) would
constitute a default by (x) any member of the Partnership Group to any Material
Contract or (y) to the knowledge of the Sellers, any other party to any Material
Contract, in each case, except for defaults which would not reasonably be
expected to have a Material Adverse Effect.
2.17 Environmental Matters. (a) For purposes of this Agreement,
the following terms shall have the following meanings:
"Environmental Claim" means any written notice, claim, demand, action,
suit, complaint, or proceeding by any person alleging liability or potential
liability (including, without limitation, liability or potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resource damages, fines or penalties) under any Environmental Laws.
"Environmental Laws" means all applicable current foreign, federal, state
and local statutes, regulations, ordinances, orders and decrees relating to
protection of the environment.
"Hazardous Materials" means all materials defined as "hazardous
substances" or "hazardous wastes," or any other term of similar import under any
Environmental Law, including, without limitation, petroleum (including crude oil
or any fraction thereof), friable asbestos, and polychlorinated biphenyls.
"Release" shall have the meaning provided in 42 U.S.C. section 9601(22).
(b) Except as set forth in Section 2.17 of the Disclosure Schedule
and except as would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect:
(i) Each member of the Partnership Group is in compliance with all
Environmental Laws;
(ii) No member of the Partnership Group has received any
Environmental Claim or is aware of any threatened Environmental Claim;
(iii) No member of the Partnership Group has entered into, has
agreed to, or is subject to any decree or order or other similar
requirement of any governmental authority under any Environmental Laws,
or is conducting any investigation, remediation, removal, monitoring or
other action relating to any Release or threatened Release at any site,
location or operation; and
(iv) No member of the Partnership Group has Released Hazardous
Materials into the environment in violation of Environmental Laws or in a
manner that would reasonably be expected to result in liability under
Environmental Laws, and to the
<PAGE> 20
15
knowledge of the Sellers, no other person has Released Hazardous
Materials into the environment at any property currently owned or
operated by any member of the Partnership Group in violation of
Environmental Laws or in a manner that would reasonably be expected to
result in liability under Environmental Laws.
2.18 Insurance. Section 2.18 of the Disclosure Schedule lists all
insurance policies held in the names of the members of the Partnership Group
covering the assets, employees and operations of the Partnership Group as of the
date hereof. All such policies are in full force and effect, all premiums due
thereon have been paid by the Partnership Group and the applicable member(s) of
the Partnership Group have complied in all material respects with the provisions
of such policies and has not received any notice from any of its insurance
brokers or carriers that such broker or carrier will not be willing or able to
renew their existing coverage. All insurance policies not held in the names of
the members of the Partnership Group but which cover the assets, employees and
operations of the Partnership Group as of the date hereof, are in full force and
effect and will remain in full force and effect until the Closing Date, at which
time, coverage thereunder will be discontinued with respect to the Partnership
Group.
2.19 Real Property. (a) Leased Properties. Section 2.19(a) of the
Disclosure Schedule lists all real property leased or subleased by any member of
the Partnership Group. The Sellers have made available to the Buyers correct and
complete copies of the leases and subleases covering the properties listed in
Section 2.19(a) of the Disclosure Schedule (as amended to the date of this
Agreement). With respect to each lease and sublease and except as otherwise
specified in Section 2.19(a) of the Disclosure Schedule or where the failure of
any of the following to be true and correct would not reasonably be expected to
have a Material Adverse Effect:
(i) such lease or sublease is, to the knowledge of the Sellers,
legal, valid and binding on the lessor, in all respects;
(ii) (1) to the knowledge of the Sellers no party to the lease or
sublease is in default beyond any applicable notice, grace or cure period
and (2) no member of the Partnership Group has received a notice of
default with respect to such lease or sublease; and
(iii) no such lease or sublease has been mortgaged, deeded in
trust or encumbered by the Partnership Group.
(b) Owned Properties. Section 2.19(b) of the Disclosure Schedule lists
all real property owned by any member of the Partnership Group. With respect to
each such parcel of owned real property listed in Section 2.19(b) of the
Disclosure Schedule and except as otherwise specified in Section 2.19(b) of the
Disclosure Schedule and except where the failure of any the following to be true
and correct would not reasonably be expected to have a Material Adverse Effect:
(i) the identified owner has good and marketable title to the
parcel of real property, free and clear of any security interest,
easement, covenant, option to sell, right
<PAGE> 21
16
of first refusal or other restriction, except for (A) liens for real
estate taxes not yet due and payable, (B) installments of special
assessments not yet delinquent and (C) recorded easements, covenants, and
other restrictions which do not materially interfere with the operation
of the Partnership Group's business;
(ii) there are no pending or, to the knowledge of the Sellers,
threatened condemnation proceedings or lawsuits; and
(iii) there are no leases, subleases, licenses, concessions, or
other written agreements, granting to any party or parties the right of
use or occupancy of any portion of the parcel of real property.
2.20 Product Liability. Except as set forth in Section 2.20 of the
Disclosure Schedule and except for matters that would not reasonably be expected
to have a Material Adverse Effect, no member of the Partnership Group has
received written notice of any claim or threatened claim against such member of
the Partnership Group for product liability.
2.21 No Brokers' or Other Fees. Except for Merrill Lynch, Pierce,
Fenner & Smith Incorporated, whose fees and expenses will be paid by the
Sellers, no broker, finder or investment banker is entitled to any fee or
commission in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of the Sellers or any member of the
Partnership Group.
2.22 Receivables. All Receivables existing on the Closing Date
will have arisen from the sale of Inventory or services to Persons not
affiliated with the Sellers, the Partnership or any Subsidiary and in the
ordinary course of the Partnership Group's business consistent with past
practice and constitute or will constitute, as the case may be, only valid,
undisputed claims of the Partnership or a Subsidiary not subject to valid claims
of set-off or other defenses or counterclaims other than normal cash discounts
accrued in the ordinary course of the Partnership Group's business consistent
with past practice. For purposes of this Agreement, "Receivables" means any and
all accounts receivable, notes and other amounts receivable by the Partnership
or any Subsidiary from third parties, including, without limitation, customers,
arising from the conduct of the business of the Partnership Group or otherwise
before the Closing Date, whether or not in the ordinary course, together with
all unpaid financing charges accrued thereon.
2.23 Inventories. Each member of the Partnership Group has good
and marketable title to its Inventories free and clear of all Encumbrances. The
Inventories (i) are in good and merchantable condition in all material respects,
are suitable and usable for the purposes for which they are intended and are in
a condition such that they can be sold in the ordinary course of the Partnership
Group's business consistent with past practice and (ii) have been valued
consistent with the Partnership Group's past practices. No member of the
Partnership Group is under any obligation or liability with respect to accepting
returns of items of Inventory or merchandise in the possession of their
customers other than in the ordinary course of business consistent with past
practice. For the purposes of this Agreement, "Inventories" means all inventory,
merchandise, finished goods and raw materials related to the Partnership Group's
business maintained, held or stored by or for the Partnership Group.
<PAGE> 22
17
2.24 Contracts with the United States Government. (a) The Sellers
(with respect to the Partnership Group) and the Partnership Group have complied
in all material respects with all applicable federal procurement laws and
regulations including, without limitation, the Truth in Negotiations Act, the
Foreign Corrupt Practices Act, the Office of Federal Procurement Policy Act
Amendments of 1988 ("Procurement Integrity" Amendments), the Cost Principles and
Cost Accounting Standards, and the Federal Acquisition Regulations and all
supplements thereto, in connection with the Government Contracts, and to the
Sellers' knowledge, no person has made any allegation that the Sellers (with
respect to the Partnership Group) or the Partnership Group have not so complied.
(b) All of the Government Contracts to which any member of the
Partnership Group or the Sellers in respect of any member of the Partnership
Group is a party have, solely with respect to actions of the Partnership Group
or the Sellers in respect of any member of the Partnership Group, been legally
awarded and are, to the Sellers' knowledge, binding on the parties thereto and
the Sellers and the Partnership Group are in compliance in all material respects
with all terms and conditions in the Government Contracts, including all terms
and conditions incorporated expressly by reference or by operation of law
therein.
(c) For the purposes of this Agreement, "Government Contracts"
means all contracts and agreements between any member of the Partnership Group
or the Sellers in respect of any member of the Partnership Group and the United
States government, a foreign government or a department or agency of the United
States government or a foreign government, including, without limitation, all
contracts to supply goods and services, and all subcontracts awarded to the
Partnership Group on or before the Closing Date.
2.25 No Other Representations or Warranties. Except for the
representations and warranties contained in this Article II, neither of the
Sellers nor any other person or entity makes any other express or implied
representation or warranty to Buyers.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYERS
The Buyers, jointly and severally, hereby represent and warrant to
the Sellers as follows:
3.1 Organization. Buyer 1 is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York. Buyer 2
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each Buyer has all requisite corporate power and
authority to own (which will be deemed for purposes of this Agreement to include
leasing and operating) its assets and to carry on its business as now being
conducted and is duly qualified or licensed to do business and is in good
standing in the jurisdictions in which the ownership of its property or the
conduct of its business requires such qualification or license, except
jurisdictions in which the failure to be so qualified or licensed
<PAGE> 23
18
would not, individually or in the aggregate, have a material adverse effect on
the ability of the Buyers to consummate the transactions contemplated by this
Agreement.
3.2 Authorization Etc. Each Buyer has full corporate power and
authority to execute and deliver this Agreement and to carry out the
transactions contemplated hereby to be carried out by it. This Agreement has
been duly and validly executed by each Buyer and, assuming this Agreement
constitutes the legal, valid and binding agreement of the Sellers, constitutes a
legal, valid and binding agreement of each Buyer, enforceable against such Buyer
in accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
3.3 No Approvals or Conflicts. The execution, delivery and
performance by the Buyers of this Agreement and the consummation by the Buyers
of the transactions contemplated hereby will not (i) violate, conflict with or
result in a breach by the Buyers of any provision of the certificates of
incorporation or by-laws of the Buyers, (ii) violate, conflict with or result in
a breach of any provision of, or constitute a default by the Buyers (or create
an event which, with notice or lapse of time or both, would constitute a
default) or give rise to any right of termination, cancellation, amendment or
acceleration under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the Buyers' properties under, any note, bond,
mortgage, indenture, deed of trust, license, franchise, permit, lease, contract,
agreement or other instrument to which the Buyers or any of their properties may
be bound, (iii) violate or result in a breach of any order, injunction,
judgment, ruling, law or regulation of any court or governmental authority
applicable to either Buyer or any of their respective properties, or (iv) except
for applicable requirements of the HSR Act and as otherwise set forth in Section
2.7 of the Disclosure Schedule, require any order, consent, approval or
authorization of, or notice to, or declaration, filing, application,
qualification or registration with, any governmental or regulatory authority,
except, with respect to the foregoing clauses (ii) and (iii) above, as would
not, individually or in the aggregate, reasonably be likely to have a material
adverse effect on the ability of the Buyers to consummate the transactions
contemplated hereby.
3.4 Financing. The Buyers have provided Sellers with commitment
letters for financing (the "Commitment Letters") which financing, together with
Buyers' cash or capital on hand, would provide Buyers (subject to the terms and
conditions thereof) sufficient funds to pay the cash Purchase Price and all
contemplated fees and expenses of the Buyers related to the transactions
contemplated hereby.
3.5 No Brokers' or Other Fees. Except for Credit Suisse First
Boston Corporation, whose fees and expenses will be paid by the Buyers, no
broker, finder or investment banker is entitled to any fee or commission in
connection with the transactions contemplated hereby based upon arrangements
made by or on behalf of the Buyers.
3.6 No Other Representations or Warranties. Except for the
representations and warranties contained in this Article III, neither of the
Buyers nor any other person or entity makes any other express or implied
representation or warranty to Sellers.
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ARTICLE IV
CONDITIONS TO SELLERS' OBLIGATION
The obligation of the Sellers to effect the Closing under this
Agreement is subject to the satisfaction, at or prior to the Closing, of each of
the following conditions, unless validly waived in writing by the Sellers.
4.1 Representations and Warranties. The representations and
warranties made by the Buyers in this Agreement shall be true (in all material
respects, in the case of those representations and warranties which are not by
their express terms qualified by reference to materiality) on and as of the
Closing Date as though such representations and warranties were made on such
date, except that any representations and warranties that are made as of a
specified date shall be true (in all material respects, in the case of those
representations and warranties which are not by their express terms qualified by
reference to materiality) as of such date.
4.2 Performance. The Buyers shall have performed and complied in
all material respects with all agreements and obligations required by this
Agreement to be so performed or complied with by them prior to the Closing.
4.3 Officer's Certificate. Each of Buyer 1 and Buyer 2 shall have
delivered to the Sellers a certificate, dated as of the Closing Date and
executed by an executive officer of such Buyer, certifying to the fulfillment of
the conditions specified in Sections 4.1 and 4.2 hereof.
4.4 HSR Act. All applicable waiting periods under the HSR Act with
respect to the transactions contemplated hereby shall have expired or been
terminated.
4.5 Injunctions. On the Closing Date there shall be (i) no
governmental Actions commenced or threatened before, or (ii) no injunction,
writ, preliminary restraining order or other order in effect of any nature
issued by, a court or governmental authority of competent jurisdiction directing
(in the case of clause (ii)) or seeking to direct (in the case of clause (i))
that the transactions provided for herein not be consummated as provided herein.
4.6 Consents. All orders, consents, approvals, permits,
authorizations, notices, declarations, filings, applications, qualifications and
registrations identified in Section 2.7 of the Disclosure Schedule and necessary
to effect the Closing shall have been obtained.
4.7 Standby Letter(s) of Credit. The Buyers shall have delivered
one or more standby letters of credit to support obligations of the Sellers
under standby letters of credit, guarantees, indemnity bonds and other credit
support instruments heretofore issued by the Sellers on behalf of the
Partnership Group and outstanding as of the Closing Date ("Seller Credit Support
Instruments"). Such standby letters of credit shall be in form and substance
reasonably satisfactory to the Sellers and shall be in an aggregate face amount
representing the aggregate amount under the Seller Credit Support Instruments.
<PAGE> 25
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ARTICLE V
CONDITIONS TO BUYERS' OBLIGATION
The obligation of the Buyers to effect the Closing under this
Agreement is subject to the satisfaction, at or prior to the Closing, of each of
the following conditions, unless validly waived in writing by the Buyers.
5.1 Representations and Warranties. The representations and
warranties made by the Sellers in this Agreement shall be true (in all material
respects, in the case of those representations and warranties which are not by
their express terms qualified by reference to materiality) on and as of the
Closing Date as though such representations and warranties were made on such
date, except that any representations and warranties that are made as of a
specified date shall be true (in all material respects, in the case of those
representations and warranties which are not by their express terms qualified by
reference to materiality) as of such date.
5.2 Performance. The Sellers shall have performed and complied in
all material respects with all agreements and obligations required by this
Agreement to be so performed or complied with by the Sellers prior to the
Closing.
5.3 Officer's Certificate. Each of the Sellers shall have
delivered to the Buyers a certificate, dated as of the Closing Date and executed
by an executive officer of such Seller, certifying to the fulfillment of the
conditions specified in Sections 5.1 and 5.2 hereof.
5.4 Resignation of Management Committee Members. The Sellers shall
have delivered to the Buyers the written resignations of all Management
Committee members of the Partnership other than those requested by the Buyers
not to be delivered, effective as of the Closing Date.
5.5 HSR Act. All applicable waiting periods under the HSR Act with
respect to the transactions contemplated hereby shall have expired or been
terminated.
5.6 Injunctions. On the Closing Date there shall be (i) no
governmental Actions commenced or threatened before, or (ii) no injunction,
writ, preliminary restraining order or other order in effect of any nature
issued by, a court or governmental authority of competent jurisdiction directing
(in the case of clause (ii)) or seeking to direct (in the case of clause (i))
that the transactions provided for herein not be consummated as provided herein.
5.7 Consents. All orders, consents, approvals, permits,
authorizations, notices, declarations, filings, applications, qualifications and
registrations identified in Section 2.7 of the Disclosure Schedule and necessary
to effect the Closing shall have been obtained.
5.8 Material Adverse Effect. There shall not have occurred and be
continuing any event, change or condition and the Buyers shall not have
discovered or otherwise become aware after the date of this Agreement of any
information that has had, or would reasonably be expected to have, a material
adverse effect on the business, assets, results of operations or
<PAGE> 26
21
financial condition of Buyer 1 and its subsidiaries and the Partnership Group on
a combined operating basis since September 30, 1999.
5.9 Market Conditions. There shall not have occurred after the
date of this Agreement, a material disruption of or a material adverse change in
financial, banking or capital market (including, without limitation, high-yield
market) conditions.
5.10 Audited Financial Statements. The Sellers shall have provided
the Buyers with an audited consolidated balance sheet of the Partnership Group
at December 31, 1999 and the related consolidated statements of income and cash
flows, together with the unqualified report thereon by the Partnership Group's
auditors.
5.11 Minimum EBITDA. Buyer 1 shall be reasonably satisfied that
(a) the Partnership Group's reported EBITDA as derived from the 1999 audited
financial statements shall not be less than $80.0 million (calculated as set
forth on Schedule 5.11), (b) the adjusted EBITDA of the Partnership Group for
the 1999 fiscal year shall not be less than $91.1 million, and shall contain
supportable positive non-recurring adjustments and other non-interest income
that in the aggregate are not less than $11.1 million and contain not less than
$4.0 million in non-recurring phantom stock plan adjustments and $1.75 million
in non-recurring severance cost adjustments and (c) the Partnership Group's
reported EBITDA as derived from the first quarter of 2000 unaudited financial
statements shall not be less than $9.75 million (calculated as set forth on
Schedule 5.11).
ARTICLE VI
COVENANTS AND AGREEMENTS
6.1 Conduct of Business by Partnership Group. The Sellers, jointly
and severally, covenant that without the consent of the Buyers, which consent
shall not be unreasonably withheld or delayed, except (i) as otherwise expressly
contemplated by this Agreement or (ii) as disclosed in Section 6.1 of the
Disclosure Schedule, from and after the date of this Agreement and until the
Closing Date the Sellers shall cause the Partnership Group to:
(a) use reasonable efforts consistent with good business judgment
to (i) preserve intact the present business organization of the
Partnership Group and operate the Partnership Group in the ordinary
course of business consistent with past practice; (ii) keep available the
services of the Partnership Group's officers and employees; and (iii)
maintain satisfactory relationships with licensors, suppliers, creditors,
distributors, customers and others having material business relationships
with the Partnership Group;
(b) notify the Buyers of any material change in the normal course
of business or operations of the Partnership Group and of any
governmental complaints, investigations or hearings of which the Sellers
or any member of the Partnership Group are notified (or communications
received by the Sellers or any member of the Partnership Group indicating
that the same may be contemplated), or the institution or settlement of
<PAGE> 27
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litigation, in each case involving any member of the Partnership Group,
and to keep the Buyers informed of such events;
(c) not (i) cause to be issued or sold any debt or equity
securities of any member of the Partnership Group or issue, grant or
enter into any options, warrants, rights, subscription agreements or
commitments of any kind with respect thereto; (ii) directly or indirectly
cause to be purchased, redeemed or otherwise acquired or disposed of any
equity of any member of the Partnership Group; (iii) declare, set aside
or pay any dividend or other distribution except for the distribution, as
a capital account reduction, of all amounts owed by the Sellers to the
Partnership Group; (iv) permit or allow any member of the Partnership
Group to borrow or agree to borrow any funds or incur, whether directly
or by way of guarantee, any obligation for borrowed money, other than in
the ordinary course of business consistent with past practice; (v)
subject any of the assets of the Partnership Group (real, personal or
mixed, tangible or intangible) to any Encumbrance or otherwise permit or
allow the sale, lease, transfer or disposition of any assets of the
Partnership Group (real, personal or mixed, tangible or intangible),
other than in the ordinary course of business consistent with past
practice; (vi) assume, guarantee, or otherwise become responsible for the
obligations of, or make any loans or advances to, any other individual,
firm or corporation (other than other members of the Partnership Group);
(vii) waive or release any rights of material value, or cancel,
compromise, release or assign any material indebtedness owed to any
member of the Partnership Group or any material claims held by any member
of the Partnership Group; (viii) except for capital expenditures not to
exceed one million dollars ($1,000,000) in the aggregate, make any
investment or expenditure of a capital nature either by purchase of stock
or securities, contributions to capital, property transfer or otherwise,
or by the purchase of any property or assets of any other individual,
firm or corporation; (ix) cancel or terminate any insurance policy naming
any member of the Partnership Group as a beneficiary or a loss payable
payee; (x) enter into any collective bargaining agreements; (xi) other
than in the ordinary course of business, in the case of new hires, as
required by any agreement in effect as of the date hereof or as required
by law (A) increase the compensation or fringe benefits of any of its
officers or (B) enter into, adopt or amend any employment agreement or
employee benefit plan with or for the benefit of any of its employees;
(xii) amend any member of the Partnership Group's organization documents;
or (xiii) agree to do any of the foregoing; and
(d) comply in all material respects with all applicable laws,
including, without limitation, applicable Environmental Laws.
6.2 Access to Books and Records; Cooperation
(a) Except as otherwise provided in Section 6.4, the Buyers agree
that from the Closing Date and until the fifth anniversary of the Closing Date,
during normal business hours on reasonable notice, they shall permit, at no cost
to the Sellers and without disruption of the business of the Buyers, the Sellers
and their respective counsel, accountants and other authorized representatives
to have access to the officers, directors, employees, accountants and other
advisors and agents, properties, books, records and contracts of the Partnership
Group for pre-
<PAGE> 28
23
Closing periods, and the right (at the Sellers' expense) to make copies and
extracts from such books, records and contracts, in each case to the extent
necessary to investigate and defend any threatened or actual litigation
involving the Partnership Group.
(b) The Buyers agree not to, and to cause their subsidiaries not
to, destroy at any time any files or records which are subject to Section 6.2(a)
without giving written notice to the Sellers, and giving the Sellers 30 days
following receipt of such notice to request in writing that all or a portion of
the records intended to be destroyed be delivered to the Sellers at the Sellers'
expense.
(c) During the period commencing on the date hereof and ending on
the Closing Date, the Partnership Group will, and the Sellers will cause the
Partnership Group to, upon reasonable request afford to the Buyers and their
counsel, accountants and other authorized representatives access at all
reasonable times upon reasonable advance notice to the officers, directors,
employees, accountants and other advisors and agents, properties, books, records
and contracts, of the Partnership Group, and the right to make copies and
extracts from such books, records and contracts, and to furnish the Buyers with
all financial, operating and other data and information concerning the
Partnership Group as Buyers and their advisors may reasonably request. The
parties agree that the provisions of the Confidentiality Agreement dated as of
November 1, 1999 between Buyer 1 and Seller 2 (the "Confidentiality Agreement")
shall continue in full force and effect following the execution and delivery of
this Agreement.
6.3 Filings and Consents. (a) Each of the Sellers and the
Partnership Group on the one hand, and each of the Buyers on the other hand,
shall use all reasonable efforts to obtain and to cooperate in obtaining any
consent, approval, authorization or order of, and in making any registration or
filing with, any governmental agency or body or other third party required in
connection with the execution, delivery or performance of this Agreement. The
parties agree to cause to be made all appropriate filings under the HSR Act
within five business days of the date of this Agreement and to diligently pursue
termination of the waiting period under such act. The parties agree to take any
and all reasonable steps necessary to avoid or eliminate any impediment under
any antitrust competition, or trade regulations law. In furtherance of the
foregoing, in the event that the Department of Justice or the Federal Trade
Commission, as the case may be, conditions clearance under the HSR Act upon the
divestiture or other disposition of any assets or businesses of the Buyers or
the Partnership Group, Buyers shall themselves make or cause the Partnership
Group to make, such required divestitures or dispositions of assets utilized in
generating no more than $25 million in 1999 revenues in order to obtain
clearance under the HSR Act.
(b) The Sellers shall, or shall cause the Partnership Group to,
use all of its or their reasonable efforts to obtain such third party consents
as the Buyers may reasonably deem necessary in connection with the transactions
contemplated by this Agreement. The Buyers shall cooperate and use all
reasonable efforts to assist the Sellers and the Partnership Group in obtaining
such consents; provided, however, that the Buyers shall have no obligation to
give any guarantee or other consideration of any nature in connection with any
such notice or consent or to consent to any change in the terms of any agreement
or arrangement which the Buyers may deem adverse to the interests of the Buyers,
the Partnership Group or the business of the Partnership
<PAGE> 29
24
Group; and provided further, that the foregoing covenants shall not be construed
to affect the Closing condition referred to in Section 5.7.
(c) The Sellers and the Buyers agree that, in the event any
consent, approval or authorization necessary or desirable to preserve for the
business of the Partnership Group, any right or benefit under any lease,
license, contract, commitment or other agreement or arrangement to which the
Sellers, or any member of the Partnership Group is a party is not obtained prior
to the Closing, the Sellers will, subsequent to the Closing, cooperate with the
Buyers and the Partnership Group in attempting to obtain such consent, approval
or authorization as promptly thereafter as practicable. If such consent,
approval or authorization cannot be obtained, the Sellers shall use their
reasonable best efforts to provide the applicable member of the Partnership
Group with the rights and benefits of the affected lease, license, contract,
commitment or other agreement or arrangement for the term of such lease,
license, contract or other agreement or arrangement, and, if the Sellers provide
such rights and benefits, the applicable member of the Partnership Group shall
assume the obligations and burdens thereunder.
(d) Notwithstanding the above, it is understood that the
provisions of this Section 6.3 shall not apply to Government Contracts.
6.4 Tax Matters; Cooperation; Preparation of Returns; Tax
Elections; Restructurings. (a) Buyers and Sellers agree to furnish or cause to
be furnished to each other, upon request, as promptly as practicable, such
information and assistance relating to the Partnership Group (including, without
limitation, access to books and records, employees, contractors and
representatives) as is reasonably necessary for the filing of all Tax Returns,
the making of any election related to Taxes, the preparation for any audit by
any Taxing Authority, and the prosecution or defense of any claim, suit or
proceeding relating to any Tax Return. Buyers and Sellers shall retain all books
and records with respect to Taxes pertaining to the Partnership Group until the
date that is sixty (60) days following the expiration of all relevant statutes
of limitations (and, to the extent notified by Sellers or Buyers, any extensions
thereof). At the end of such period, each party shall provide the other with at
least ten days prior written notice before destroying any such books and
records, during which period the party receiving such notice can elect to take
possession, at its own expense, of such books and records.
(b) Sellers shall prepare and file timely, or cause to be prepared
and filed timely, all Tax Returns in respect of each member of the Partnership
Group for the taxable year ending on or before the Closing Date. Sellers shall
timely pay to the relevant Taxing Authority all Taxes due in connection with any
such Tax Return. Buyers shall reimburse Sellers within five (5) days of the date
on which Taxes are paid with respect to such Tax Returns, an amount equal to the
reserve for current Taxes reflected on the 1999 Balance Sheet.
(c) Buyers shall prepare and file timely or cause to be prepared
and filed timely all Tax Returns in respect of each member of the Partnership
Group for the taxable year ending after the Closing Date which begin before the
Closing Date (a "Straddle Period").
<PAGE> 30
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(d) After the Closing Date, each of the Sellers and the Buyers
shall promptly notify the other parties in writing upon receipt of written
notice of the commencement of any Tax audit or administrative or judicial
proceeding or of any demand or claim on any Seller, any Buyer, or any member of
the Partnership Group which, if determined adversely to the taxpayer or after
the lapse of time, would be grounds for indemnification by the other party under
Section 6.5 of this Agreement. In the case of an audit or administrative or
judicial proceeding that related to periods ending on or before the Closing
Date, the Sellers shall have the sole right, at their expense, to control the
conduct of such audit or proceeding. If the Sellers choose to control the audit
or proceeding, the Buyers shall execute or cause to be executed powers of
attorney or other documents necessary to enable Sellers to take all actions
desired by Sellers with respect to such proceeding. Sellers shall not settle any
such proceeding without Buyers' consent, which consent may not be unreasonably
withheld. In the case of an audit or administrative or judicial proceeding that
relates to a Straddle Period, the Buyers shall have the right, at their expense,
to control the conduct of such audit or proceeding, provided, however, that (i)
the Sellers shall have the right, at their expense, to participate in such
proceeding and (ii) the Buyers will act upon all reasonable recommendations made
by the Sellers and (iii) the Buyers will not settle or refuse to settle any such
proceeding without Sellers' consent, which will not be unreasonably withheld. In
the case that Sellers give written notice that they wish to settle an item based
on an offer from a Taxing Authority which relates to the pre-Closing portion of
such Straddle Period, but the Buyers do not settle such item, then the Sellers'
liability for Taxes and related costs and expenses relating to such an item
shall not exceed the amount the Sellers' liability for such Taxes and related
costs and expenses would have been if the item had been settled on the terms and
at such time offered by the such Taxing Authority. The parties shall promptly
notify the others if such party decides not to control the defense or settlement
of any proceeding which they are entitled to control pursuant to this Agreement
and the other parties thereupon shall be permitted to defend and settle such
proceeding.
(e) The Sellers and the Buyers shall share in the ratio of 50/50
all real property transfer and other transfer, documentary, gains, conveyance,
or similar Taxes with respect to transactions contemplated by this Agreement,
provided, that, in no event shall the Buyers' liabilities under this Section
6.4(e) exceed $500,000.
(f) The Sellers agree to furnish or cause to be furnished such
information and assistance and take such actions necessary, at the Buyers'
request, to enable the Buyers to make an election under section 338(h)(10) of
the Code with respect to the stock of any domestic Subsidiaries in the
Partnership Group. The Sellers shall pay all domestic Taxes incurred as a result
of making such election.
(g) The Sellers agree to furnish or cause to be furnished such
information and assistance and take such actions necessary, at the Buyers'
request, to enable the Buyers to make an election under section 338(g) of the
Code with respect to the stock of any non-domestic subsidiaries in the
Partnership Group. The Sellers shall pay all domestic Taxes incurred as a result
of making such election.
(h) The Sellers and the Partnership Group on the one hand and the
Buyers on the other hand shall cooperate with one another and use their
reasonable best efforts to develop a
<PAGE> 31
26
plan to enable the Buyers or any affiliates of the Buyers to purchase outside of
the United States stock or assets of any Subsidiaries in the Partnership Group
held outside of the United States (a "Direct Purchase"). On or prior to the
Closing Date, the Buyers and the Sellers shall enter into, or cause to be
entered into, such agreements as are necessary to implement any such plans for a
Direct Purchase which are requested by the Buyers and consented to by the
Sellers, such consent not to be unreasonably withheld or delayed. The Buyers
shall pay all Taxes and related costs and expenses incurred as a result of any
actions taken pursuant to this Section 6.4(h); provided, that such Taxes and
costs and expenses are in excess of the amount that the Sellers would have paid
if they did not take such actions pursuant to this Section 6.4(h).
(i) The Sellers and the Partnership Group on the one hand and the
Buyers on the other hand shall cooperate with one another and use their
reasonable best efforts to develop a plan to enable the members of the
Partnership Group to distribute cash from, and undertake a restructuring of,
their businesses including any restructuring to enable the making of a section
338(h)(10) election if requested pursuant to Section 6.4(f) hereof prior to the
Closing Date (a "Restructuring Transaction"); provided, however, that the
Sellers shall not undertake or implement any Restructuring Transaction or
distribution of cash that would cause the representation and warranty contained
in Section 2.6(b) hereof to be breached. On or prior to the Closing Date, the
Buyers and the Sellers shall enter into, or cause to be entered into, such
agreements as are necessary to implement any such plans for a Restructuring
Transaction which are requested by the Sellers and consented to by the Buyers,
such consent not to be unreasonably withheld or delayed. The Sellers shall be
liable for and pay all Taxes and related costs and expenses incurred as a result
of any actions taken pursuant to this Section 6.4(i).
6.5 Tax Indemnity. (a) Sellers agree to jointly and severally
indemnify and hold Buyers, the Partnership Group and their affiliates harmless
against any Taxes (except to the extent of the amount described as "Accrued
income taxes" on the 1999 Balance Sheet less any amount paid by the Buyers to
the Sellers under Section 6.4(b) hereof) and against any loss, damage, liability
or expense, including reasonable fees for attorneys and other outside
consultants, incurred in contesting or otherwise in connection with any such
Taxes: (i) (x) in the case of Income Taxes of any Subsidiary and (y) in the case
of all other Taxes imposed on or payable by any member of the Partnership Group
with respect to any taxable period or a portion thereof that ends on or before
the Closing Date, (ii) arising from the breach of any representation, warranty
or covenant of Sellers with respect to Taxes under this Agreement, with respect
to any taxable period, or portion thereof, that ends on or before the Closing
Date (and also a taxable period or portion thereof beginning after the Closing
Date in the case of the representation contained in Section 2.12(b)(vii)); (iii)
with respect to a Straddle Period, Taxes imposed on or payable by any member of
the Partnership Group which are allocable, pursuant to paragraph (d) hereof, to
the portion of such period ending on the Closing Date; (iv) for which any member
of the Partnership Group is jointly or severally liable with any affiliate of
the Sellers or other third party relating to the period that such person was a
member of an affiliated group with such affiliate of the Sellers or other third
party; or (v) for which the Sellers are liable under Sections 6.4(e), 6.4(f),
6.4(g) and 6.4(i) hereof. No indemnity shall be provided under this Agreement
for any Taxes resulting from any transaction of any member of the Partnership
Group occurring after the Closing Date or on the Closing Date after the Closing,
other than any Taxes for which the
<PAGE> 32
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Sellers are liable (i) under Sections 6.4(f) and 6.4(g) hereof or (ii) as the
result of the breach of representation contained in Section 2.12(b)(vii) hereof.
(b) Subject to the provisions set forth in this Agreement, the
Buyers and the Partnership Group shall indemnify the Sellers and their
affiliates against all Taxes imposed on any member of the Partnership Group,
which Taxes are not subject to indemnification pursuant to paragraph (a) of this
Section 6.5, including, but not limited to, Taxes (A) resulting from any
transaction of any member of the Partnership Group occurring after the Closing
Date or on the Closing Date after the Closing, other than any Taxes for which
the Sellers are liable (i) under Sections 6.4(f) and 6.4(g) hereof or (ii) as
the result of the breach of representations contained in Section 2.12(b)(vii)
hereof, or (B) with respect to any taxable period that begins after the Closing
Date and that are imposed on any member of the Partnership Group or (C) any
Taxes for which the Buyers are liable under Sections 6.4(b), 6.4(e) and 6.4(h).
(c) Payment by the indemnitor of any amount due under this Section
6.5 shall be made within ten days following written notice by the indemnitee
that payment of such amounts to the appropriate Taxing Authority is due,
provided that the indemnitor shall not be required to make any payment earlier
than two days before it is due to the appropriate Taxing Authority. In the case
of a Tax that is contested in accordance with the provisions of Section 6.4(d)
above, payment of the Tax to the appropriate Taxing Authority shall not be
considered to be due earlier than the date a final determination to such effect
is made by the appropriate Taxing Authority or court.
(d) With respect to any Tax that is payable with respect to a
Straddle Period, the portion of any such Tax allocable to the portion of the
period ending on the Closing Date shall be deemed to equal: (i) in the case of
Taxes that are based upon or related to income or receipts, that amount which
would be payable if the taxable year ended with the Closing Date, and (ii) in
the case of Taxes imposed on a periodic basis and measured by the level of any
item, the amount of such Taxes for the entire period multiplied by a fraction
the numerator of which is the number of calendar days in the period ending with
the Closing Date and the denominator of which is the number of calendar days in
the entire period.
6.6 Employees; Benefit Plans.
(a) Benefit Plans. (i) As of the Closing Date, Buyers shall cause
the Partnership to assume the Partnership Group Plans (other than the plans
referred to in Section 6.6(a)(ii) below) and the Partnership (with Buyers as
guarantors), shall be solely and entirely responsible for satisfying any and all
obligations and liabilities with respect to such Partnership Group Plans (the
"Transferred Plans"). Sellers shall have no liability whatsoever (either under
this Agreement or otherwise) and Buyers shall indemnify and hold Sellers
harmless with respect to Partnership Employees for benefits under the
Transferred Plans. Sellers and Buyers shall take all actions necessary and
appropriate to establish Buyers as successors to all of Sellers rights, assets,
duties, liabilities and obligations under or with respect to the Transferred
Plans.
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(ii) (A) The Sellers shall retain or assume the Phantom Stock Plan
applicable to the Partnership Employees (the "PSP") and shall be solely and
entirely responsible for satisfying any and all obligations and liabilities with
respect to the PSP.
(B) As of the Closing Date, Seller 2 shall assume each U.S.
Partnership Group Plan that is a qualified defined benefit pension plan
(the "Assumed Pension Plans"), and shall assume as employer thereunder
the assets and liabilities accrued through the Closing Date with respect
to the Assumed Pension Plans; provided, however, that Buyers shall
indemnify and hold harmless Seller 2 and each Assumed Pension Plan, for
any and all liability arising out of or in connection with the "rule of
75/80" benefit (including any shut-down benefits) (the "75/80 Benefit")
under the Assumed Pension Plans, regardless of whether such liability
relates to periods of service on or before the Closing Date; provided,
further, that if prior to the Closing Date Sellers terminate employees
triggering 75/80 Benefit liability, Sellers, and not Buyers, shall be
solely responsible for such 75/80 Benefit liability. In connection with
Buyers' liability for the 75/80 Benefit, Buyers shall, as of the Closing
Date and for five years thereafter (or until drawn, if earlier),
maintain an irrevocable letter of credit for Seller 2's benefit, in form
and substance reasonably satisfactory to Seller 2, in the face amount of
twenty million dollars ($20,000,000). The letter of credit shall provide
that it may only be drawn in full but not in part. The letter of credit
shall also provide that, in the event the issuing bank elects not to
renew the letter of credit at any time, such issuing bank or Buyers
shall notify Seller 2 no less than 45 days prior to the expiration of
the letter of credit, and Buyers shall provide a replacement letter of
credit, in form and substance satisfactory to Seller 2, prior to the
15th business day before the expiration. Any failure by Buyers to
replace or maintain the required letter of credit in accordance with the
terms of the preceding sentence shall permit Seller 2 to draw down from
the then outstanding letter of credit the amounts thereunder. Seller 2
shall promptly return to Buyers (without interest) any amounts drawn
down in connection with the immediately preceding sentence that remain
unused after all liabilities with respect to the 75/80 Benefit under the
Assumed Pension Plans have been satisfied. In no event shall the letter
of credit or amounts payable thereunder be or be construed as a
limitation of Buyers' obligations hereunder. As soon as it is
practicable following the execution of this Agreement the Sellers will
request that their actuaries provide the Buyers' actuaries with the
preliminary data and information which is anticipated to be used by the
Sellers' actuaries for the January 1, 2000 actuarial valuation of the
Assumed Pension Plans reasonably necessary for the Buyers' actuaries to
attempt to estimate any projected 75/80 Benefit liability. As of the
Closing Date, the Partnership Employees shall cease to accrue benefits
under the Assumed Pension Plans and shall be fully vested in all
benefits accrued as of such date, and such Plans shall be frozen for all
purposes. As of the Closing Date, Buyers shall, or shall cause the
Partnership Group to, establish replacement pension plans for the
Partnership Employees (the "New Pension Plans"), which, in the case of
Union Employees (as defined below) shall be on terms substantially
identical to the corresponding Assumed Pension Plan. Buyers or the
Partnership Group, as appropriate, shall credit all service with the
Partnership Group or Sellers prior to the Closing Date that was
recognized under the Assumed Pension Plans (i) for purposes of vesting
and eligibility under the New Pension Plans established for Partnership
Employees other than
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29
Union Employees and (ii) for all purposes under the New Pension Plans
applicable to Union Employees (including, without limitation,
eligibility, vesting, benefit accrual and entitlement to the 75/80
Benefit or any other benefits or benefit enhancements); provided,
however, that any benefits payable under the New Pension Plans shall be
reduced by benefits payable under the Assumed Pension Plans with respect
to the periods of service prior to the Closing Date. Buyers shall
indemnify and hold harmless Sellers for any and all liability arising
from or in connection with the adoption, implementation and operation of
the New Pension Plans.
(C) Except for Buyers' obligation with respect to the 75/80
Benefit as described in subsection (B), above, or Buyers' obligation
with respect to post-retirement welfare benefits as described in
subsection (iii), below, Buyers and the Partnership shall have no
liability whatsoever (either under this Agreement or otherwise) and
Sellers shall indemnify and hold Buyers and the Partnership harmless
with respect to benefits and liabilities under or relating to the PSP,
the Assumed Pension Plans and any post-retirement welfare benefit
arrangements for Partnership Employees who terminate employment prior to
the Closing Date.
(D) Prior to the Closing the Sellers shall assume and shall be
solely and entirely responsible for satisfying any and all obligations
and liabilities under severance and special bonus agreements between the
Partnership and the individuals listed in Section 2.16 of the Disclosure
Schedule under Section 2.16(a)(vii).
(iii) In the event that any Partnership Employee who retires or
otherwise terminates from employment with Sellers prior to the Closing Date and
is entitled to post-retirement welfare benefits from Sellers becomes employed by
Buyers or the Partnership Group on or after the Closing Date (a "Former
Retiree"), Buyers shall be liable to, and shall indemnify and hold harmless,
Sellers for any and all of such post-retirement welfare benefits for such Former
Retiree, regardless of when incurred. Buyers shall pay such amounts to Sellers
upon hire of the Former Retiree or as and when incurred, as applicable, but no
later than 10 days thereafter. Promptly upon the hiring of any Former Retiree by
Buyers or the Partnership Group, Buyers shall notify Sellers in writing of such
hiring.
(b) Continuation of Competitive Benefit Plans. (i) Subject to
Section 6.6(a)(ii)(B), for not less than one year following the Closing Date,
Buyers shall maintain, or shall cause the Partnership Group to maintain, (A)
salaries for Partnership Employees at levels no less favorable than the salary
rates in effect immediately prior to the Closing Date for such Partnership
Employees and (B) employee benefit plans and arrangements (other than any
special bonus or incentive arrangements not in the ordinary course) for
Partnership Employees (other than such employees who are subject to a collective
bargaining agreement ("Union Employees")) that, in the aggregate, are
competitive with salaries and employee benefit plans provided by Buyers and
those generally provided in the Partnership's industry in the relevant
jurisdictions.
(c) Collective Bargaining Agreement(s). Buyers shall assume the
obligations of the Sellers pursuant to the terms of the collective bargaining
agreement(s) set forth in Section 2.14 of the Disclosure Schedule to which the
Sellers are parties on the Closing Date with respect
<PAGE> 35
30
to Union Employees and shall continue the employment of all Union Employees
covered by said agreements under the same terms and conditions of employment as
existed on the Closing Date.
(d) Prior Service; Deductibles. Buyers shall recognize each
Partnership Employee's service with the Sellers or the Partnership Group as of
the Closing Date as service with Buyers for all purposes, as applicable in
Buyers' employee welfare benefit plans, employee pension plans as described in
Section 6.6(a)(ii)(B), vacation, disability, severance and other employee
benefit plans or policies, but only to the extent that such service was
recognized by Sellers or the Partnership Group under the applicable Partnership
Group Plans. In addition, Buyers shall, or shall cause the Partnership Group to,
waive any pre-existing condition limitations and eligibility waiting periods
under the employee welfare benefit plans applicable to Partnership Employees or
their respective dependents and shall recognize (or cause to be recognized) the
dollar amount of all expenses incurred by Partnership Employees and their
respective dependents during the calendar year in which the Closing Date occurs
for purposes of satisfying the deductibles and co-payment or out-of-pocket
limitations for such calendar year under the relevant employee welfare benefit
plans of Buyers.
(e) Accrued Vacation. Buyers shall, or shall cause the Partnership
Group to, credit each current Partnership Employee (and, to the extent any such
amount is owing to any former Partnership Employee, each such former Partnership
Employee) with the accrued and unused vacation days and any personal and
sickness days accrued in accordance with the vacation and personnel policies and
labor agreements of Sellers or the Partnership Group in effect as of the Closing
Date and as listed in Section 6.6(e) of the Disclosure Schedule.
(f) Severance Obligations. Sellers and Buyers agree that the
transactions contemplated hereby shall not constitute a severance of employment
of any Partnership Employee prior to the consummation of the transactions
contemplated hereby, and that such employees will be deemed for all purposes to
have continuous and uninterrupted employment before and immediately after the
Closing Date. Except as required by law or an applicable collective bargaining
agreement and other than with respect to those individuals listed in Section
2.16 of the Disclosure Schedule under Section 2.16(a)(vii), Buyers shall provide
severance and other separation benefits to each Partnership Employee terminated
by Buyers within one year following the Closing Date (or, in the case of
Partnership Employees who are subject to a collective bargaining agreement, the
period required therein, if greater) upon terms and conditions that are no less
favorable to the severance and other separation benefits provided to similarly
situated employees by Buyers and their affiliates in effect on the date of this
Agreement. Buyers shall be responsible for any claim made on or after the
Closing Date by any Partnership Employee for severance or other separation
benefits including, without limitation, in connection with the consummation of
the transaction contemplated hereby, for any contractual, statutory or other
claims arising out of or in connection with any termination of employment on or
after the Closing Date.
(g) Annual Incentive Compensation. Effective as of the Closing
Date through December 31, 2000, Buyers shall, or shall cause the Partnership
Group to, maintain annual incentive compensation plans utilizing target bonus
levels that are substantially equal to the target bonus levels under the annual
incentive compensation plans in which similarly situated
<PAGE> 36
31
employees of Buyers participate immediately prior to the Closing Date, which may
utilize different performance objectives and measurements than the plans in
which the Partnership Employees participate immediately prior to the Closing
Date. In addition, Buyers shall, or shall cause the Partnership Group to, pay
all bonuses payable under such incentive compensation plans to any Partnership
Employees in respect of calendar year 2000 no later than March 31, 2001.
(h) Cooperation. The parties agree to furnish each other with such
information concerning employees and employee benefit plans, and to take all
such other action, as is necessary and appropriate to effect the transactions
contemplated hereby.
(i) Foreign Employment Matters. (1) Employment. Without limiting
the generality of Sections 6.6(b), 6.6(c), 6.6(d) and 6.6(f), as of the Closing
Date, Buyers shall, or shall cause the Partnership Group to, assume or retain
and be responsible for the employment (including any employment contracts) of
the Partnership Employees who are employed outside the United States (the
"Foreign Employees"), and Buyers shall, or shall cause the Partnership Group to,
take any and all actions necessary or appropriate (if any) to continue the
employment of such Foreign Employees and assume or retain all obligations and
liabilities relating to their employment (including, but not limited to, any
employment contracts) under applicable laws and practices without Sellers or any
of their affiliates having any liability to any such employees for severance,
redundancy, termination, payment in lieu of notice, indemnity or other payments
to any of such employees by reason of, or as a result of, the actions
contemplated by this Agreement.
(2) Employee Benefit Plans for Foreign Employees. Without limiting
the generality of Sections 6.6(a) and 6.6(b), effective as of the Closing Date,
Buyers shall, or shall cause the Partnership Group to, maintain, establish
and/or qualify or register with applicable regulatory authorities employee
benefit plans for, or shall extend existing Foreign Partnership Group Plans to,
the Foreign Employees to the extent required by applicable law and, for not less
than one year following the Closing Date, provide benefits to the Foreign
Employees on terms and conditions which are competitive with those provided by
Buyers and those generally provided in the Partnership's industry in the
relevant jurisdictions.
(j) No Third-Party Beneficiary Rights or Right to Employment.
Nothing herein expressed or implied shall confer upon any of the employees of
the Sellers, Buyers, or any of their affiliates, any additional rights or
remedies, including, without limitation, any right to enforce the provisions of
this Agreement and any additional right to employment, or continued employment
for any specified period, of any nature or kind whatsoever under or by reason of
this Agreement.
6.7 Labor Matters. (a) The Buyers and the Sellers agree that for
purposes of the WARN Act, the Closing Date shall be the "effective date" as such
term is used in the WARN Act. The Buyers acknowledge and represent that they
have no present intent to engage in or permit a "mass layoff" or "plant closing"
with respect to any member of the Partnership Group which will require the
Sellers to provide notification pursuant to the WARN Act. The Buyers agree that
from and after the Closing Date the Partnership Group shall be responsible for
any
<PAGE> 37
32
notification required under the WARN Act with respect to the Partnership Group
members. The Sellers agree that between the date hereof and the Closing Date,
they will cause the Partnership Group not to effect or permit a "plant closing"
or "mass layoff" as these terms are defined in the WARN Act with respect to any
member of the Partnership Group without notifying the Buyers in advance and
without complying with the notice requirements and all other provisions of the
WARN Act.
(b) The Buyers and the Sellers shall cooperate in connection with
any required notification to, or any required consultation with, the employees,
employee representatives, work councils, unions, labor boards and relevant
government agencies concerning the transactions contemplated by this Agreement
with respect to the Foreign Employees of any member of the Partnership Group.
6.8 Covenant to Satisfy Conditions. Each party hereto agrees to
use all reasonable efforts to insure that the conditions set forth in Article IV
and Article V hereof are satisfied, insofar as such matters are within the
control of such party.
6.9 Contact With Customers and Suppliers. The Buyers and their
representatives shall contact and communicate with the employees, customers,
suppliers and licensors of the Partnership Group in connection with the
transactions contemplated hereby only with the prior written consent of the
Sellers, which consent may be conditioned upon a designee of the Sellers being
present at any such meeting or conference.
6.10 Projections. In connection with Buyers' investigation of the
Partnership Group and its businesses, Buyers may have received, or may receive,
from Sellers, the Partnership Group and/or their respective representatives
certain projections and other forecasts for the Partnership Group and certain
business plan and budget information. Buyers acknowledge that (i) there are
uncertainties inherent in attempting to make such projections, forecasts, plans
and budgets, (ii) Buyers are familiar with such uncertainties, (iii) Buyers are
taking full responsibility for making their own evaluation of the adequacy and
accuracy of all estimates, projections, forecasts, plans and budgets so
furnished to them, and (iv) absent fraud or bad faith, Buyers will not assert
any claim against Sellers, the Partnership Group or any of their respective
directors, officers, employees, affiliates or representatives, or hold Sellers,
the Partnership Group or any such persons liable, with respect thereto.
6.11 Competition. (a) Each Seller agrees that from the Closing
until the third anniversary of the Closing Date, it will not directly or
indirectly engage or invest in any business in competition with the business of
the Partnership Group as conducted immediately prior to the Closing as described
in Section 6.11 of the Disclosure Schedule (the "Business"). It is understood
and agreed that (i) no Seller shall be deemed to be in default with respect to
the foregoing covenants as a result of any investment it may make in not more
than five percent of the outstanding shares or other units of any security
subject to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, (ii) the provisions of this Section 6.11(a) shall not
apply to any business activities of the Sellers, or any of their direct or
indirect affiliates, actually being conducted as of the date hereof, other than
the Partnership Group,
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33
(iii) this Section 6.11(a) shall not be construed to prohibit either Seller,
directly or through any affiliate, from hereafter acquiring and continuing to
own and operate any entity which has operations that compete with the business
of the Partnership Group as conducted immediately prior to the Closing if such
operations account for no more than twenty-five percent (25%) of such entity's
(including its subsidiaries and divisions) consolidated revenues, and (iv) the
provisions of this Section 6.11(a) shall not be construed to prohibit either
Seller, directly or through any affiliate, from selling inventory or other
assets currently owned by a subsidiary or affiliate.
(b) In the event that the covenants contained in Section 6.11(a)
are more restrictive than permitted by law, the parties hereto agree that the
covenants contained in Section 6.11(a) shall be enforceable and enforced to the
extent permitted by law.
(c) Each of the parties hereto acknowledges and agrees that the
remedy at law for any breach of the requirements of this Section 6.11 would be
inadequate, and agrees and consents that without intending to limit any
additional remedies that may be available, temporary and permanent injunctive
and other equitable relief may be granted without proof of actual damage or
inadequacy of legal remedy in any proceeding which may be brought to enforce any
of the provisions of this Section 6.11.
6.12 Certain Environmental Matters. From and after the Closing:
(a) Sellers agree, with respect to the items in Section 2.17 of
the Disclosure Schedule under the heading "Walpole", to perform to the
extent affirmatively required under Environmental Laws environmental
investigations, remedial action or corrections of non-compliance with
Environmental Laws and any other actions affirmatively required under
Environmental Laws relating to conditions existing as of the Closing Date
("Remedial Action") provided that such Remedial Action shall: (i) be the
least costly alternative acceptable to governmental authorities; (ii) be
based upon non-residential (as opposed to residential) standards; and
(iii) not exceed any applicable requirements of Environmental Laws in
effect on the date of such Remedial Action.
(b) Buyers shall provide reasonable access to such location on
reasonable advance notice for the purpose of performance of such Remedial
Action. Sellers shall perform all Remedial Actions in material compliance
with all applicable Environmental Laws and in a manner that will minimize
any disruption to Buyers or their activities at such properties.
(c) Buyers shall agree to the imposition of reasonable deed
restrictions or environmental land use restrictions on such location as
necessary at the Seller's discretion, to implement such Remedial Action;
provided that such deed restrictions or environmental land use
restrictions do not restrict the use of such properties to uses that are
more restrictive than their use as of the Closing Date or any
substantially similar use.
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34
(d) Buyers agree that they shall cooperate with Sellers regarding
Sellers' obligations under this Section 6.12, including without
limitation cooperating to avoid or minimize expense to Sellers, and
Buyers further agree that they shall not solicit or importune any
governmental entity to require any Remedial Action unless required to do
so by Environmental Laws. Buyers agree that they shall, in good faith,
agree to enter, when reasonably consistent with their obligations under
this Section 6.12, into an agreement with the governmental entity having
jurisdiction over the Remedial Action to use the least costly method and
least stringent standard in connection with such Remedial Action;
provided that such method and standard are acceptable to such
governmental entity and will not restrict the use of such properties to
uses that are more restrictive than their use as of the Closing Date or
any substantially similar use.
(e) The Sellers shall be solely and fully responsible to undertake
and pay for any Remedial Action related to any property transferred from
the Sellers to the Buyers pursuant to the transactions contemplated by
this Agreement, which Remedial Action is necessary to comply with the New
Jersey Industrial Site Recovery Act ("ISRA").
6.13 Environmental Rights and Responsibilities After Execution of
Agreement. (a) "Identified Environmental Liability" means (i) those matters
listed in Section 6.13 of the Disclosure Schedule and (ii) any action, event,
circumstance or condition related to the Partnership Group or any of their owned
or operated properties that constitutes either a violation of Environmental Law
or a Release of any Hazardous Material into the environment which requires any
response action under Environmental Law or by a government agency and that, in
either case, is also identified in any report prepared by or for the Buyers of
any environmental site assessment conducted pursuant to paragraph (b) below.
(b) During the period commencing on the date hereof and ending on
the Closing Date, the Buyers shall have the right, pursuant to an access
agreement to be reasonably agreed to among Sellers, Buyers and their agents, to
enter the properties to be transferred from the Sellers to the Buyers pursuant
to the transactions contemplated by this Agreement (excluding the Walpole and
Phillipsburg properties) for the purpose of conducting any environmental site
assessment reasonably deemed appropriate by them, including, without limitation,
surveying such properties and installing thereon equipment to collect samples
from air, surface water, groundwater, soil or any other environmental medium;
provided, that such activities shall not unreasonably disrupt operations at, or
cause damage to, such properties. The Sellers shall provide reasonable access on
reasonable advance notice to the Buyers for this purpose pursuant to this
Section 6.13(b). At Sellers' request Buyers shall split all samples taken in
connection with the environmental site assessments authorized pursuant to this
Section 6.13(b).
(c) The Sellers agree, jointly and severally, to indemnify, defend
and hold harmless the Buyers Indemnified Persons (as defined in Section 8.1(a))
from and in respect of any and all Losses (as defined in Section 8.1(a)) that
they may incur arising out of or due to any Identified Environmental Liability.
Buyers agree that any Remedial Action relating to an Identified Environmental
Liability shall be subject to indemnification hereunder only to the extent such
Remedial Action shall: (i) be the least costly alternative acceptable to
governmental
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35
authorities; (ii) be based upon non-residential (as opposed to residential)
standards; and (iii) not exceed any applicable requirements of Environmental
Laws in effect on the date of such Remedial Action. Buyers' shall not
unreasonably withhold consent to the imposition of reasonable deed restrictions
or environmental land use restrictions on such locations as necessary at the
Seller's discretion, to implement such Remedial Action; provided that such deed
restrictions or environmental land use restrictions do not restrict the use of
such properties to uses that are more restrictive than their use as of the
Closing Date or any substantially similar use. Buyers agree that they shall
cooperate with Sellers regarding Sellers' obligations under this Section 6.13,
including without limitation cooperating to avoid or minimize expense to
Sellers, and Buyers further agree that they shall not solicit or importune any
governmental entity to require any Remedial Action unless required to do so by
Environmental Laws. Buyers agree that they shall, in good faith, agree to enter,
when reasonably consistent with their obligations under this Section 6.13, into
an agreement with the governmental entity having jurisdiction over the Remedial
Action to use the least costly method and least stringent standard in connection
with such Remedial Action; provided that such method and standard are acceptable
to such governmental entity and will not restrict the use of such properties to
uses that are more restrictive than their use as of the Closing Date or any
substantially similar use.
6.14 Uses of Names.
(a) The Partnership's rights to use the term "Dresser" or any
"Dresser" logo or design (the "Dresser Name") in the combined name
"Ingersoll-Dresser" as or as a part of a trade name, corporate name, domain
name, trademark or service mark shall be governed solely by the terms and
provisions of the Partnership Agreement, the Organization Agreement and the
Transaction Agreement (collectively, the "Partnership Documents").
(b) The Partnership's rights to use the term "Ingersoll" or any
"Ingersoll" logo or design owned by Seller 2 (the "Ingersoll Name") in the
combined name "Ingersoll-Dresser" as or as a part of a trade name, corporate
name, domain name, trademark or service mark shall be governed by the terms and
provisions of this Agreement and the Partnership Documents. To the extent that
any of the provisions of this Agreement or the Partnership Documents are
inconsistent with the terms of this Section 6.13, the terms of this Section 6.13
shall govern. The Buyers and the Partnership acknowledge and agree that, except
as expressly provided in this Section 6.13, the Partnership shall have no right
to use the Ingersoll Name as or as a part of any trade names, corporate names,
domain names, trademarks or service marks or any names or marks confusingly
similar thereto.
(i) The Partnership agrees to use the Ingersoll Name in good
faith, solely in connection with the conduct of the Business, in a dignified
manner and in accordance with good trademark practice wherever the Ingersoll
Name is used. The Partnership agrees not to use the Ingersoll Name in connection
or combination with any name, logo, trademark, service mark, inscription or
designation (whether owned by itself or a third party) other than in the
combined name "Ingersoll-Dresser" without the prior written consent of Seller 2.
The Partnership shall at no time adopt or use any variation of the Ingersoll
Name or any word or mark similar to or likely to be confused with the Ingersoll
Name.
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(ii) Subject to this Section 6.13, Seller 2 hereby covenants and
agrees that, notwithstanding anything in Section 3.8 of the Organization
Agreement to the contrary, Seller 2 shall not revoke, rescind, terminate,
cancel, decrease or limit the current rights of the Partnership to use the
Ingersoll Name, but solely in the combined name "Ingersoll-Dresser" in
connection with the conduct of the Business, as a trade name, corporate name,
domain name, trademark or service mark (including in any domain names that
contain the name "Ingersoll-Dresser"), or take, or assist any third party in
taking, any action that challenges, or is inconsistent with, the Partnership's
rights thereto, prior to the date that is two (2) years after the Closing Date.
(iii) The Partnership agrees to maintain and preserve the quality
of (1) the uses of the Ingersoll Name and (2) the goods and services in
connection with which the Ingersoll Name is used, so that they are consistent
with the current high standards and reputation for quality associated with
Seller 2 and the business of the Partnership. Upon reasonable request by Seller
2, the Partnership shall furnish to Seller 2 for its inspection samples of
goods, advertising and/or promotional materials that bear or are used in
connection with the "Ingersoll-Dresser" name.
(iv) The Partnership agrees to defend, indemnify and hold harmless
Seller 2, its Affiliates, and their officers, directors, employees, agents and
representatives ("Seller 2 Parties") against all liabilities, losses, damages,
claims, costs, interests, judgments, fines, amounts paid in settlement and
expenses (including reasonable attorneys' fees and litigation expenses) incurred
by any Seller 2 Party arising from or relating to any action, suit or proceeding
by a third party relating to any use of the Ingersoll Name by the Partnership
that is not expressly authorized pursuant to this Agreement or the Partnership
Documents.
(v) Notwithstanding the terms set forth in this Section 6.13 or in
Section 9.4, the Partnership shall have no right to assign or sublicense to any
third party its rights under this Agreement or the Partnership Documents, or
otherwise permit any third party, to use the Ingersoll Name. The Partnership
shall have the right to permit its Subsidiaries to use the Ingersoll Name in a
manner that is consistent with the Partnership's rights to so use the Ingersoll
Name (as set forth in this Agreement and the Partnership Documents) without the
prior written consent of Seller 2; provided, that in such instances, Seller 2
shall have the same rights vis-a-vis such Subsidiary as it has vis-a-vis the
Partnership pursuant to this Agreement and the Partnership Documents.
(c) Unless earlier terminated pursuant to this Agreement or the
terms of any of the Partnership Documents, the Partnership's right to use the
Ingersoll Name as set forth herein and therein shall expire on the date that is
two (2) years after the Closing Date. Upon such termination or expiration of the
Partnership's rights, the Partnership shall promptly take all steps necessary,
including any steps deemed necessary by Seller 2 in its sole discretion, to
cancel and/or abandon any and all U.S., state or foreign registrations and any
applications therefor issued to or filed by or on behalf of the Partnership or
any of its Affiliates of any trade name, corporate name, domain name, trademark
or service mark that incorporates the Ingersoll Name. From and after the
Closing, the Sellers shall not use any of the tradenames listed in Section 2.15
of the Disclosure Schedule.
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37
6.15 Lease. Concurrent with the Closing, the Sellers and Buyers
shall cause the Partnership to enter into a real property lease with Seller 2
substantially on the terms set forth in Section 6.15 of the Disclosure Schedule.
6.16 Financing. The Buyers will use all commercially reasonable
efforts to obtain the financing described in the Commitment Letters or other
financing on terms reasonably acceptable to the Buyers sufficient to enable
Buyers to complete the transactions contemplated by this Agreement.
6.17 Government Contracts. (a) The parties acknowledge that, in
accordance with applicable United States Government policy and guidance, the
Sellers and the Buyers are required to enter into a novation agreement or
agreements with the United States Government in order to transfer Government
Contracts to the Buyers. Each of the Sellers and the Buyers will cooperate fully
with each other and will use all reasonable efforts to obtain consents to the
assignment, or the novation, of all Government Contracts, and the Sellers and
the Buyers hereby agree expeditiously to take all steps necessary to file and to
use all reasonable efforts to obtain all required novations or approvals of
assignments, including the execution and delivery of agency agreements
appointing the Buyers as agents of the Sellers with respect to each Government
Contract relating to or involving the business of the Partnership Group until
such Government Contract is novated, and the provision by the Sellers of the
guarantee of performance and the assumption by the Buyers of all obligations
under the Government Contracts required for novation of contracts pursuant to
applicable United States Government policy and guidance. Nothing in this
Agreement, however, shall require (1) the Sellers and the Buyers to pay any
consideration for any such consent or novation, or (2) the Buyers to accept any
conditions, requirements, amendments or limitations (other than those contained
in the underlying contracts) which the Buyers reasonably determine to be
unacceptable.
(b) With respect to any Government Contracts that cannot be
assigned to the Buyers or novated on the Closing Date, the performance
obligations of the Sellers thereunder shall, unless not permitted by such
Government Contract, be deemed to be subcontracted or delegated to the Buyers
until such Government Contract has been assigned or novated. The Buyers or any
of their subsidiaries, as a subcontractor or delegate, shall perform such
Government Contracts and the Sellers shall, as soon as practicable, pay over to
Buyers in full any amounts received by the Sellers (net of any actual
out-of-pocket costs in connection therewith) as a result of performance by the
Buyers of such Government Contracts. Prior to the assignment or novation of such
Government Contracts to the Buyers, the Sellers, as the contracting party, shall
take such timely action as is reasonably necessary to allow the Buyers or any of
their subsidiaries to perform such Government Contracts and to protect any
rights that may exist or accrue under such Government Contracts until they are
assigned or novated. In the event any Government Contract is not assigned or
novated, the Buyers shall indemnify the Sellers for all liabilities resulting
from the Buyers' performance as the subcontractor of the Sellers with respect to
such Government Contract, including liabilities arising out of any termination
thereof and shall otherwise indemnify the Sellers for all liabilities incurred
by the Sellers or their affiliates as a result of the failure to obtain the
necessary consent or novation of such Government Contract.
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(c) If, after the Closing Date, the Sellers and the Buyers obtain
the necessary consent for the assignment or novation of a Government Contract
for which an assignment or novation is required, then such Government Contract
shall be deemed to be assigned and transferred to the Buyers promptly after the
Sellers and the Buyers obtain such consent or novation. Effective upon the
assignment or novation of a Government Contract to the Buyers, the Government
Contract shall be deemed to be assumed by the Buyers provided that the Sellers
shall reimburse the Buyers for any monetary benefit received by the Sellers (net
of any actual out-of-pocket costs of the Seller in connection with such
Government Contract) that would have accrued to the Buyers had the Government
Contract been assigned or novated as of the Closing Date to the extent not
already paid over to the Buyers. Any subcontract or other Government Contract
which the Seller and the Buyers have theretofore entered into or agreed upon in
respect of such contract shall be terminated effective as of the date of such
assignment.
(d) After the Closing, the Sellers and the Buyers shall cooperate
with each other and use their reasonable efforts to preserve all bids,
quotations and proposals made in the ordinary course of the Partnership Group's
business and to facilitate the award thereof consistent with applicable legal
requirements. Any contracts awarded to the Sellers pursuant to such bids,
quotations and proposals shall be deemed to be assumed and, in the case of
contracts with the United States Government, shall be deemed to be "Government
Contracts" for purposes of this Agreement and shall be governed by this Section
6.17.
(e) The parties shall cooperate with each other to facilitate the
Buyers' obtaining necessary security clearance from the U.S. Departments of
Defense and Energy, including the Defense Investigative Service.
6.18 Financing Cooperation. The Sellers agree to provide, and will
cause the Partnership Group and their respective officers, employees and
advisors to provide, all reasonably necessary cooperation in connection with the
arrangement of the financing by the Buyers to be consummated contemporaneous
with the Closing in respect of the transactions contemplated by this Agreement.
ARTICLE VII
TERMINATION
7.1 Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing:
(a) by the mutual consent of the Sellers and the Buyers;
(b) by the Buyers if the Closing has not occurred on or before
June 30, 2000, unless the failure of such consummation shall be due to
the failure of the Buyers to comply in all material respects with the
representations, warranties, agreements and covenants contained herein to
be performed by the Buyers on or before June 30, 2000;
<PAGE> 44
39
(c) by the Sellers if the Closing has not occurred on or before
June 30, 2000, unless the failure of such consummation shall be due to
the failure of the Sellers to comply in all material respects with the
representations, warranties, agreements and covenants contained herein to
be performed by the Sellers on or before June 30, 2000; or
(d) by either the Sellers or the Buyers if any court or
governmental authority of competent jurisdiction shall have issued an
order, decree or ruling or taken any other action restraining, enjoining
or otherwise prohibiting the transactions contemplated hereby and such
order, decree or ruling or other action shall have become final and
nonappealable.
7.2 Procedure and Effect of Termination. In the event of the
termination of this Agreement and the abandonment of the transactions
contemplated hereby by the Sellers or the Buyers pursuant to Section 7.1 hereof,
written notice thereof shall forthwith be given to the other parties. If this
Agreement is terminated and the transactions contemplated by this Agreement are
abandoned as provided herein:
(a) Each party will redeliver all documents, work papers and other
material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the
party furnishing the same;
(b) The provisions of the Confidentiality Agreement shall continue
in full force and effect; and
(c) No party to this Agreement will have any liability under this
Agreement to any other except (i) that nothing herein shall relieve any
party from any liability for any breach of any of the representations,
warranties, covenants and agreements set forth in this Agreement and (ii)
as contemplated by paragraph (b) above and by Section 9.1.
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification. (a) Indemnification by the Sellers. Subject
to the limits set forth in this Section 8.1, the Sellers agree, jointly and
severally, to indemnify, defend and hold the Buyers and their affiliates
(including, after the Closing Date, the Partnership Group) and their respective
officers, directors, partners, stockholders, employees, agents and
representatives (the "Buyers Indemnified Persons") harmless from and in respect
of any and all liabilities, claims, interest, awards, judgments, fines,
penalties, amounts paid in settlement, losses, damages, costs and expenses
(including, without limitation, reasonable fees and expenses of counsel and
consultants) (collectively, "Losses"), that they may incur arising out of or due
to (i) any inaccuracy of any representation or the breach of any warranty,
covenant, undertaking or other agreement of the Sellers contained in this
Agreement or the Disclosure Schedule, exclusive of Sections 2.6(b), 2.12, 2.17,
6.4 and 6.5 herein; (ii) the Transaction Agreement as it relates to
<PAGE> 45
40
Sellers' obligations thereunder but not the Partnership's obligations
thereunder; (iii) the breach of any representation or warranty contained in
Section 2.6(b); (iv) the breach of any representation or warranty contained in
Section 2.17; (v) any Losses in excess of related reserves on the Partnership
Group's December 31, 1999 audited balance sheet (on an aggregate related
reserves basis but not on a case by case reserve basis) stemming from (a) claims
of product liability for products manufactured by the Partnership Group prior to
the Closing Date and (b) warranty claims for products manufactured by the
Partnership Group prior to the Closing Date; or (vi) environmental liabilities
stemming from activities that occurred prior to the formation of the Partnership
in 1992 or related in any way to the Partnership Group's property in
Phillipsburg, New Jersey except for any such liabilities caused directly by
affirmative acts of the Buyers as lessees thereof. Anything to the contrary
contained herein notwithstanding, (x) none of the Buyers Indemnified Persons
shall be entitled to recover from the Sellers for any claims for indemnity or
damages under Section 8.1(a)(i) unless and until the total of all such claims in
respect of Losses under Section 8.1(a)(i) exceeds five million seven hundred
fifty thousand dollars ($5,750,000), and then only for the amount by which such
claims exceed such amount, (y) none of the Buyer Indemnified Persons shall be
entitled to recover from the Sellers for any claims for indemnity or damages
under Section 8.1(a)(iv), unless and until the total of all such claims in
respect of Losses under Section 8.1(a)(iv) exceeds two million dollars
($2,000,000), and then only for the amount by which such claims exceed such
amount, and (z) the Buyers Indemnified Parties shall not be entitled to recover
more than an aggregate of three hundred eighty-seven million five hundred
thousand dollars ($387,500,000) from the Sellers for any claims for indemnity
with respect to inaccuracies or breaches of representations or warranties. This
Article VIII and Sections 6.12 and 6.13 hereof constitute the sole remedies of
the Buyers Indemnified Persons against the Sellers regarding Losses relating to
Environmental Laws or Hazardous Materials and the Buyers Indemnified Persons
hereby waive all other rights or causes of action against the Sellers under or
relating to Environmental Laws or Hazardous Materials.
(b) Indemnification by the Buyers. Subject to the limits set forth
in this Section 8.1, the Buyers jointly and severally agree to indemnify, defend
and hold the Sellers and their respective agents and representatives (the
"Sellers Indemnified Persons") harmless from and in respect of any and all
Losses that they may incur arising: (i) out of or due to any inaccuracy of any
representation or the breach of any warranty, covenant, undertaking or other
agreement of the Buyers contained in this Agreement; (ii) as a result of the
conduct of business of any member of the Partnership Group after the Closing
Date; and (iii) under any guarantees, standby letters of credit or other forms
of credit support provided by either of the Sellers or any of their affiliates
to third parties in respect of obligations of any members of the Partnership
Group.
(c) Indemnification Calculations. (i) The amount of any Losses for
which indemnification is provided under this Article VIII shall be computed net
of any insurance proceeds received by the indemnified party in connection with
such Losses. If an indemnified party receives insurance proceeds in connection
with Losses for which it has received indemnification, such party shall refund
to the indemnifying party the amount of such insurance proceeds when received,
up to the amount of indemnification received. An indemnified party shall use
commercially reasonable efforts to pursue insurance claims with respect to any
Losses. If the amount with respect to which any claim is made under this Article
VIII or under Section
<PAGE> 46
41
6.5 (an "Indemnity Claim") gives rise to a currently realizable actual Tax
Benefit (as defined below) to the party making the claim, the indemnity payment
shall be reduced by the amount of such Tax Benefit actually available to the
party making the claim. For purposes of this Section 8.1(c), a "Tax Benefit" to
a party means an amount by which the tax liability of such party (or group of
affiliates including such party) is actually reduced (including, without
limitation, by deduction, reduction of income by virtue of entitlement to
refund, credit or otherwise) as such amount may actually be reduced by, but not
below zero, any increase in such party's tax liability as a result of its
receipt of payment for such Indemnity Claim plus any related interest received
from the relevant Taxing Authority. Where a party has other losses, deductions,
credits or items available to it, the Tax Benefit from any losses, deductions,
credits or items relating to the Indemnity Claim shall be deemed to be realized
after any other losses, deductions, credits or items. For the purposes of this
Section 8.1(c), a Tax Benefit is "currently realizable" to the extent that such
Tax Benefit is actually realized in terms of reducing the actual amount of Taxes
payable in the current taxable period or year or in any Tax Return with respect
thereto (including through a carryback to a prior taxable period) or in any
taxable period or year prior to the date of the Indemnity Claim. In the event
that there should be a determination disallowing the Tax Benefit, the
indemnifying party shall be liable to refund to the indemnified party the amount
of any related reduction previously allowed or payments previously made to the
indemnifying party pursuant to this Section 8.1(c). The amount of the refunded
reduction or payment shall be deemed a payment under this Section 8.1(c) and
thus shall be paid subject to any applicable reductions under this Section
8.1(c)(i) or any applicable increases under Section 8.1(c)(ii).
(ii) The parties agree that any indemnification payments made
pursuant to this Agreement shall be treated for Tax purposes as an adjustment to
the Purchase Price, unless otherwise required by applicable law, in which case
such payments shall include any actual Taxes paid by the indemnified party as a
result of receipt of the indemnity payment provided that such payment is made
with respect to the same taxable year in which the indemnified party accrues or
receives the indemnification payment.
(d) Survival of Representations and Warranties. The
representations and warranties of the parties contained in this Agreement or in
any instrument delivered pursuant hereto will survive the Closing Date and will
remain in full force and effect thereafter until the second anniversary of the
Closing Date, provided that (i) the representations and warranties set forth in
Sections 2.3, 2.4, 2.21, the first sentence of each of Section 2.1(a), (b) and
(c), and Sections 3.2 and 3.5 will survive the Closing Date and will remain in
full force and effect until the expiration of the applicable statute of
limitations (after giving effect to waiver, mitigation or extension thereof),
(ii) the representations and warranties set forth in Section 2.12 will survive
the Closing and will remain in full force and effect until the date that is
sixty (60) days following the expiration of the applicable statute of
limitations after giving effect to waiver, mitigation or extension thereof, and
(iii) the representations and warranties set forth in Section 2.17 will survive
the Closing Date and will remain in full force and effect until the tenth
anniversary of the Closing Date; provided, further, that such representations or
warranties shall survive (if at all) beyond such period with respect to any
inaccuracy therein or breach thereof, written notice of which shall have been
duly given within such applicable period in accordance with Section 8.1(e)
hereof.
<PAGE> 47
42
(e) Notice and Opportunity to Defend. If there occurs an event
which a party asserts is an indemnifiable event pursuant to Section 8.1(a) or
8.1(b), the party or parties seeking indemnification shall notify the other
party or parties obligated to provide indemnification (the "Indemnifying Party")
promptly. If such event involves (i) any claim or (ii) the commencement of any
action or proceeding by a third person, the party seeking indemnification will
give such Indemnifying Party prompt written notice of such claim or the
commencement of such action or proceeding; provided, however, that the failure
to provide prompt notice as provided herein will relieve the Indemnifying Party
of its obligations hereunder only to the extent that such failure prejudices the
Indemnifying Party hereunder. In case any such action shall be brought against
any party seeking indemnification and it shall notify the Indemnifying Party of
the commencement thereof, the Indemnifying Party shall be entitled to
participate therein or, following the delivery by the Indemnifying Party to the
party or parties seeking indemnification of the Indemnifying Party's
acknowledgment in writing that the relevant Loss is an indemnified liability
hereunder and that the Indemnifying Party, in its good faith judgment, will be
able to pay any award of money damages against the indemnified party in
connection with such action, to assume the defense thereof, with counsel
selected by the Indemnifying Party and, after notice from the Indemnifying Party
to such party or parties seeking indemnification of such election so to assume
the defense thereof, the Indemnifying Party shall not be liable to the party or
parties seeking indemnification hereunder for any legal expenses of other
counsel or any other expenses subsequently incurred by such party or parties in
connection with the defense thereof. The Indemnifying Party and the party
seeking indemnification agree to cooperate fully with each other and their
respective counsel in connection with the defense, negotiation or settlement of
any such action or asserted liability. The party or parties seeking
indemnification shall have the right to participate at their own expense in the
defense of such action or asserted liability. If the Indemnifying Party assumes
the defense of an action (A) no settlement or compromise thereof may be effected
(i) by the Indemnifying Party without the written consent of the indemnified
party (which consent shall not be unreasonably withheld or delayed) unless (x)
there is no finding or admission of any violation of law or any violation of the
rights of any person by any indemnified party and no adverse effect on any other
claims that may be made against any indemnified party and (y) all relief
provided is paid or satisfied in full by the Indemnifying Party or (ii) by the
indemnified party without the consent of the Indemnifying Party, such consent
not to be unreasonably withheld or delayed, and (B) the indemnified party may
subsequently assume the defense of such action if a court of competent
jurisdiction determines that the Indemnifying Party is not vigorously defending
such action. In no event shall an Indemnifying Party be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld or delayed).
(f) Payment. On each occasion that any indemnified party shall be
entitled to indemnification or reimbursement under this Section 8.1, the
Indemnifying Party shall, at each such time, promptly pay the amount of such
indemnification or reimbursement. If any indemnified party shall be entitled to
indemnification under this Section 8.1, the Indemnifying Party shall pay the
indemnified party's costs and expenses arising as a result of a proceeding
directly relating to an indemnifiable Loss (including, without limitation, any
reasonable fees paid to witnesses), periodically as incurred.
<PAGE> 48
43
(g) Tax Indemnity. Notwithstanding anything to the contrary in
this Section 8.1 (other than as specifically set forth in Sections 8.1(c) and
(d)), indemnification with respect to Taxes shall be governed solely by Section
6.5.
ARTICLE IX
MISCELLANEOUS
9.1 Fees and Expenses. Except as otherwise provided in this
Agreement, the Sellers shall bear their own expenses and the expenses of their
respective affiliates and the Buyers shall bear their own expenses in connection
with the preparation and negotiation of this Agreement and the consummation of
the transactions contemplated by this Agreement. Each of the Sellers and the
Buyers shall bear the fees and expenses of any broker or finder retained by such
party or parties and their respective affiliates in connection with the
transactions contemplated herein.
9.2 Governing Law. This Agreement shall be construed under and
governed by the laws of the State of New York.
9.3 Amendment. This Agreement may not be amended, modified or
supplemented except upon the execution and delivery of a written agreement
executed by the Buyers and the Sellers.
9.4 No Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto without
the prior written consent of the Buyers, in the case of assignment by any
Seller, and the Sellers, in the case of any assignment by any Buyer, except that
any Buyer may assign its rights under this Agreement to one or more of its
affiliates without the consent of the Sellers, provided, however, that no such
assignment shall relieve either of the Buyers of its obligations hereunder.
9.5 Waiver. Any of the terms or conditions of this Agreement which
may be lawfully waived may be waived in writing at any time by each party which
is entitled to the benefits thereof. Any waiver of any of the provisions of this
Agreement by any party hereto shall be binding only if set forth in an
instrument in writing signed on behalf of such party. No failure to enforce any
provision of this Agreement shall be deemed to or shall constitute a waiver of
such provision and no waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
9.6 Notices. Any notice, demand, or communication required or
permitted to be given by any provision of this Agreement shall be deemed to have
been sufficiently given or served for all purposes if (a) personally delivered,
(b) mailed by registered or certified first-class mail, prepaid with return
receipt requested, (c) sent by a nationally recognized overnight courier
service, to the recipient at the address below indicated or (d) delivered by
facsimile which is
<PAGE> 49
44
confirmed in writing by sending a copy of such facsimile to the recipient
thereof pursuant to clause (a) or (c) above:
If to Buyer 1:
Flowserve Corporation
222 West Las Colinas Blvd
Suite 1500
Irving, TX 75039-5421
Attn: Ronald F. Shuff
(972) 443-6843 (telecopier)
(972) 443-6543 (telephone)
With a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attn: John J. Madden
(212) 848-7179 (telecopier)
(212) 848-7055 (telephone)
If to Buyer 2:
Flowserve RED Corporation
c/o Flowserve Corporation
222 West Las Colinas Blvd
Suite 1500
Irving, TX 75039-5421
Attn: Ronald F. Shuff
(972) 443-6843 (telecopier)
(972) 443-6543 (telephone)
With a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attn: John J. Madden
(212) 848-7179 (telecopier)
(212) 848-7055 (telephone)
<PAGE> 50
45
If to Seller 1:
IDP Acquisition, LLC
c/o Ingersoll-Rand Company
200 Chestnut Ridge Road
Woodcliff Lake, NJ 07675
Attn: Corporate Secretary
(201) 573-3448 (telecopy)
(201) 573-3121 (telephone)
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: Richard A. Garvey
(212) 455-2502 (telecopier)
(212) 455-2578 (telephone)
If to Seller 2:
Ingersoll-Rand Company
200 Chestnut Ridge Road
Woodcliff Lake, NJ 07675
Attn: Corporate Secretary
(201) 573-3448 (telecopy)
(201) 573-3121 (telephone)
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attn: Richard A. Garvey
(212) 455-2502 (telecopier)
(212) 455-2578 (telephone)
or to such other address as any party hereto may, from time to time, designate
in a written notice given in like manner.
Except as otherwise provided herein, any notice under this
Agreement will be deemed to have been given (x) on the date such notice is
personally delivered or delivered by facsimile, (y) four days after the date of
mailing if sent by certified or registered mail or (z) the next succeeding
business day after the date such notice is delivered to the overnight courier
<PAGE> 51
46
service if sent by overnight courier; provided that in each case notices
received after 4:00 p.m. (local time of the recipient) shall be deemed to have
been duly given on the next business day.
9.7 Complete Agreement. This Agreement, the Confidentiality
Agreement and the other documents and writings referred to herein or delivered
pursuant hereto contain the entire understanding of the parties with respect to
the subject matter hereof and thereof and supersede all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
9.8 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
9.9 Publicity. The Sellers and the Buyers will consult with each
other and will mutually agree upon any publication or press release of any
nature with respect to this Agreement or the transactions contemplated hereby
and shall not issue any such publication or press release prior to such
consultation and agreement except as may be required by applicable law or by
obligations pursuant to any listing agreement with any securities exchange or
any securities exchange regulation, in which case the party proposing to issue
such publication or press release shall make all reasonable efforts to consult
in good faith with the other party or parties before issuing any such
publication or press release and shall provide a copy thereof to the other party
or parties prior to such issuance.
9.10 Headings. The headings contained in this Agreement are for
reference only and shall not affect in any way the meaning or interpretation of
this Agreement.
9.11 Severability. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
9.12 Third Parties. Except as specifically set forth or referred
to herein, nothing herein expressed or implied is intended or shall be construed
to confer upon or give to any person or corporation, other than the parties
hereto and their permitted successors or assigns, any rights or remedies under
or by reason of this Agreement.
9.13 CONSENT TO JURISDICTION. THE PARTIES HERETO HEREBY CONSENT TO
THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE AREA
ENCOMPASSED BY THE SOUTHERN DISTRICT OF THE STATE OF NEW YORK AND IRREVOCABLY
AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT SHALL BE LITIGATED IN SUCH COURTS. THE PARTIES HERETO EACH ACCEPT FOR
ITSELF AND IN
<PAGE> 52
47
CONNECTION WITH ITS RESPECTIVE PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
EXCLUSIVE JURISDICTION AND VENUE OF THE AFORESAID COURTS AND WAIVE ANY DEFENSE
OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY NON-APPEALABLE
JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT.
9.14 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY LAW,
THE PARTIES HERETO HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION. THE
PARTIES HERETO ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH
MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF ANY OF THE OTHER PARTIES. THE SCOPE
OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT
MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF
DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE PARTIES HERETO
ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS
AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
FUTURE DEALINGS. THE PARTIES HERETO FURTHER WARRANT AND REPRESENT THAT EACH HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE
EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL
BY THE COURT.
<PAGE> 53
IN WITNESS WHEREOF, each Buyer and each Seller has caused this
Agreement to be executed by its duly authorized officer, in each case as of the
day and year first above written.
FLOWSERVE CORPORATION
By: /s/ Ronald F. Shuff
----------------------------------------------
Name: Ronald F. Shuff
Title: Vice President - Secretary
and General Counsel
FLOWSERVE RED CORPORATION
By: /s/ Ronald F. Shuff
----------------------------------------------
Name: Ronald F. Shuff
Title: Vice President
IDP ACQUISITION, LLC
By: Ingersoll-Rand Company
(As its Sole Member)
By: /s/ Joseph A. Kiah
----------------------------------------------
Name: Joseph A. Kiah
Title: Vice-President
INGERSOLL-RAND COMPANY
By: /s/ Joseph A. Kiah
----------------------------------------------
Name: Joseph A. Kiah
Title: Vice-President
<PAGE> 54
Solely for purposes of Section 6.14 hereof:
INGERSOLL-DRESSER PUMP COMPANY
By: Ingersoll-Rand Company (a General Partner)
By: /s/ Joseph A. Kiah
--------------------------------------------
Name: Joseph A. Kiah
Title: Vice-President
By: IDP Acquisition, LLC (a General Partner)
By: Ingersoll-Rand Company
(As its Sole Member)
By: /s/ Joseph A. Kiah
--------------------------------------------
Name: Joseph A. Kiah
Title: Vice-President
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 23,935
<SECURITIES> 0
<RECEIVABLES> 238,796
<ALLOWANCES> (5,432)
<INVENTORY> 208,475
<CURRENT-ASSETS> 508,475
<PP&E> 533,391
<DEPRECIATION> (309,941)
<TOTAL-ASSETS> 965,013
<CURRENT-LIABILITIES> 190,709
<BONDS> 322,266
0
0
<COMMON> 51,856
<OTHER-SE> 259,236
<TOTAL-LIABILITY-AND-EQUITY> 965,013
<SALES> 285,309
<TOTAL-REVENUES> 285,309
<CGS> 186,080
<TOTAL-COSTS> 263,863
<OTHER-EXPENSES> (3,217)
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<INTEREST-EXPENSE> 6,523
<INCOME-PRETAX> 18,140
<INCOME-TAX> 6,258
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